00161811

WINTER 2016

The Fundamentals of Investing

ALSO IN THIS ISSUE:

3 TIPS FOR INVESTORS TO HELP BUILD LONG-TERM WEALTH Catch-Up Contributions What they are and how they make a significant difference over time.

Planning for Retirement when You’re Self-Employed INVESTING IS AN IMPORTANT SKILL FOR THOSE LOOKING TO BUILD LONG-TERM WEALTH, but it can be confusing to figure out how much money to keep in stocks, bonds and cash, and how that mix relates to your long-term financial goals. Here are a few principles as a refresher, or to get you get started.

Build a diversified portfolio A healthy diet comprises a variety of foods. The same principle applies to a healthy portfolio, which ideally contains a variety of types of investments.

Your asset allocation typically should include stocks, bonds and cash. This diverse mixture of investments reduces the likelihood that any single investment’s performance dictates how your whole portfolio performs. How much you hold in each asset class depends on your time horizon and risk tolerance. Time horizon is how much time you have before you plan to withdraw the funds. Risk tolerance is your comfort with the unpredictable nature of investing. The more comfortable you are with price fluctuations, the more risk you may be willing to take.

Continued on page 2

What to consider when it comes to weighing your savings options.

Market Commentary The changing landscape of retirement income sources.

Continued from page 1

Younger investors may consider holding a substantial portion of their investments in stocks to take advantage of their long-term growth potential. Though stocks are likely to experience short-term ups and downs, they have historically provided more growth potential than bonds and cash. Plus, young investors saving for retirement may have enough time to ride out short-term losses. As older investors approach retirement, and have less time to recover from downturns, they may consider holding a larger allocation of bonds and cash. Once you settle on an appropriate asset allocation strategy, you may want to diversify your holdings within each asset group. For example, within your stock portion, hold mutual funds that include shares of hundreds of different companies that are geographically diverse and differ in size, as well as the sector of the economy.

Take a long-term approach As the market moves up and down, it’s easy to get bogged down by concern over short-term gains and losses. However, short-term fluctuations don’t necessarily tell you much about your portfolio’s long-term potential. An appropriate asset allocation strategy, as discussed previously, may help protect you from near-term market risk as you save for long-term goals such as retirement. So rather than focus on the day-to-day movements of the market, create and stick to a long-term financial plan that may help you meet your goals. This plan can identify your objectives, as well as how much you need to save for each of them and in what time frame.

may be simply to do nothing: Avoid overreacting to daily market news headlines, stick to your long-term investment plan, and ride out the market’s short-term ups and downs.

However, focusing on the future doesn’t mean you should make a plan and forget it. Rather, set aside time annually or semiannually to review your plan and your progress. At that time you can make changes as necessary, adjusting the amount you save—or modifying your allocation to suit your needs.

To eliminate the urge to invest emotionally, consider investing in a target date fund such as State Farm® LifePath® Funds. As you near the target date for needing your retirement savings, these diversified mutual funds become more conservative by automatically reducing their risk exposure over time. That means you can pick the fund with a date nearest the year you plan to retire, which allows you to focus on saving, not shifting, your investment mix.

Keep emotions out of the picture Emotional impulses and mental biases can get in the way of rational decision-making when it comes to your finances. One of investing’s biggest challenges is keeping those natural human reactions from affecting your investment decisions.

A firm foundation Investing can feel overwhelming. But often the best approach is the simplest. Whether you’re just starting out as an investor or have been managing a portfolio for years, following fundamental investing principles can help you manage risk and build long-term wealth. And remember, if you have any questions about investing, visit statefarm.com® to learn more.

For example, consider loss aversion, the tendency for people to be more emotionally affected by losses than by gains. This often leads investors to sell stocks during market downturns. As a result, they turn paper losses into real losses, and miss the opportunity to benefit from a potential rebound. In many cases, the wiser choice Asset allocation and diversification do not assure a profit or protect against a loss.

LifePath Funds are target-date portfolios whose investment objectives are adjusted over time to be more conservative as the target date (date the investor plans to start withdrawing their funds) approaches. The principal value of the fund(s) is not guaranteed at any time, including at the target date. Bonds are subject to interest rate risk and may decline in value due to an increase in interest rates LifePath® is a registered trademark of BlackRock Institutional Trust Company, N.A. State Farm VP Management Corp. is a separate entity from BlackRock Fund Advisors (BFA), the sub-adviser to the State Farm S&P 500® Index Fund, the Small Cap Index Fund, the International Index Fund, and the LifePath Funds.

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CATCH-UP CONTRIBUTIONS The Internal Revenue Service allows workers approaching retirement age to make additional annual catch-up contributions to their 401(k) or IRA accounts. Catch-up contributions can make a big difference in your retirement savings over time.

HYPOTHETICAL ILLUSTRATION OF COMPOUNDING BOTH JOE AND ANDREW INVEST MONEY IN THEIR 401(K) ACCOUNTS FROM AGE 50 TO 65.

AGE AT WHICH CATCH-UP CONTRIBUTIONS ARE FIRST PERMITTED.

401(K) CONTRIBUTION LIMITS

$ 18,000

JOE

401(k) AND 403(b)

$ 6,000

1

$ 24,000 ($18,000 + $6,000)

ANDREW

STANDARD CATCH-UP CONTRIBUTIONS

Additional contribution permitted to 401(k) and 403(b) accounts, ON TOP OF THE $18,000 STANDARD CONTRIBUTION LIMIT.

50

65 AGE

$1,000,000

JOE

$900,000

$ 907,144

ANDREW

$800,000 $700,000 $600,000

TRADITIONAL AND ROTH IRAs

$1,000

1

Catch-up contribution for Traditional and Roth IRAs, IN ADDITION TO THE $5,500 STANDARD CONTRIBUTION LIMIT.

$ 743,867

$500,000

ANDREW

163,000

$400,000

$

$300,000 $200,000 $100,000 $0 50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

Assumes $100,000 initial balance and 6% return compounded at end of each year on contributions made at beginning of the year. This hypothetical example is for illustrative purposes only and does not represent any specific type of investment. It does not include the impact of expenses or fees, which would have reduced the results of the illustration.

As soon as you’re eligible, consider making room in your budget for catch-up contributions, which can help you meet your retirement savings goals.

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By taking full advantage of catch-up contributions, Andrew enters retirement with more than $163,000 in additional retirement savings than Joe.

1 Based on 2016 limits. A 10 percent tax penalty may apply for withdrawals from tax-qualified products before age 59½.

PLANNING FOR RETIREMENT WHEN YOU’RE SELF-EMPLOYED What to consider when it comes to weighing your savings options

HOW TO CONTACT US:

MORE THAN 15 MILLION AMERICANS ARE SELF-EMPLOYED.1 And while entrepreneurship has its rewards, they do not include the benefits traditionally extended to salaried employees—including retirement plans. Without employer-sponsored options to choose from, self-employed investors are responsible for opening, funding and managing their retirement plans. The most common plan options for a self-employed investor provide tax-deductible contributions and tax-deferred growth. But each plan has distinctive features that can make it better suited to one investor or another. Entrepreneurs may want to consider the following features of each plan:

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INDIVIDUAL(K) PLAN

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Who may want to enroll Self-employed individuals who have no employees other than their spouses and seek high contribution limits. Contribution limits Individual(k) investors can put away considerable pre-tax dollars each year because they can make contributions as an employee and employer. An investor can contribute $18,000 annually as an employee, $24,000 if age 50 or older. And as an employer, an investor can then contribute as much as 25 percent of the business’ profit, for a total maximum contribution of $54,000. The same limits apply if the investor’s spouse is an employee of the business, meaning a couple can effectively double their annual contribution. Considerations • Contribution amounts are flexible from year to year. An investor can save the maximum during years when the business is thriving, and scale back when things slow down. • The plan is customizable to allow for loans against the account balance, as well as the ability to take hardship distributions. • Individual(k) plans can take some work to set up and maintain. If the value of an individual(k) account is greater than $250,000, an investor must file a special annual report with the IRS. EMPLOYEE PENSION (SEP–IRA) Who may want to enroll Self-employed individuals and small-business owners who want an easy, flexible way to save. Contribution limit The contribution percentage can vary each year, from 0 percent to 25 percent of compensation, up to an annual maximum of $54,000.

Considerations • A SEP is easy to set up and operate. No annual reports to file with the IRS. • All eligible employees must be allowed to participate. SAVINGS INVESTMENT MATCH PLAN FOR EMPLOYEES (SIMPLE IRA) Who may want to enroll Self-employed individuals and small-business owners who are interested in contributing to their employees’ retirement. Contribution limit $12,500 of self-employed income annually ($15,500 for those 50 and older) Considerations • The employer may choose a match of 3 percent or may use a 2 percent non-elective formula for all eligible employees. This contribution is tax-deductible to the employer. • Generally, the 10 percent tax penalty on distribution applies to participants under age 59½. For withdrawals during the twoyear period beginning on the date of the first contribution, the tax penalty is 25 percent. • It is easy to set up, administer and add new employees. START SAVING NOW Whichever plan a self-employed investor determines is best for his or her situation, the most important decision is to start saving for retirement now. Even if entrepreneurs can’t contribute the maximum today, committing to make regular contributions and increasing the size of those deferrals over time can help them and their employees move closer to realizing their retirement goals.

Bureau of Labor Statistics 2016, http://www.bls.gov/news.release/empsit.t09.htm

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A 10 percent tax penalty may apply for withdrawals from tax-qualified products and/or non tax-qualified annuities before age 59½.

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Call In — 1.800.447.4930 (for State Farm Associates call 1.800.447.0740) Mon-Fri 8AM-6PM CT. Or use our interactive voice response system 24 hours a day, 7 days a week.

LET TECHNOLOGY WORK FOR YOU: Download the Pocket Agent® Mobile app for your smartphone or tablet. • Manage mutual fund accounts. • View transaction history. • View pending transactions.

VISIT STATEFARM.COM TO: • Sign up for electronic delivery. • View your personal portfolio. • Obtain current values. • View transaction history. • View and print statements. • Purchase, exchange or redeem shares. Investing involves risk, including potential for loss.

Before investing, consider the funds’ investment objectives, risks, charges and expenses. Contact State Farm VP Management Corp (1.800.447.4930) for a prospectus or summary prospectus containing this and other information. Read it carefully. AP2016/09/0953

Not FDIC Insured

No Bank Guarantee May Lose Value

An electronic version of the Mutual Funds Investor newsletter can be accessed on statefarm.com by searching for Investor Newsletter.

STATE FARM MARKET RECAP

As of September 30, 2016

EQUITIES RECAP   Global equity markets moved slightly higher in September,

as the month largely avoided any major events.   In the U.S., equities delivered mixed returns in September, with investors focused on central bank actions and the upcoming presidential election in November. For the month, large-cap stocks, as measured by the S&P 500® Index, were flat, while mid- and smallcap stocks, as measured by the Russell Midcap® Index and Russell 2000® Index, posted total returns of 0.2% and 1.1%, respectively.

EQUITIES MARKET PERFORMANCE Total Returns for Periods Ended September 30, 2016 YTD

20%

1 YR.

5 YR.

15% 10% 5% 0% S&P 500 Index (Large Cap)

Russell Midcap Index (Mid Cap)

Russell 2000 Index (Small Cap)

MSCI EAFE Free Index (International)

U.S. EQUITIES   U.S. equities remained relatively flat for the second

straight month but still managed to end the third quarter in positive territory. For the quarter, the S&P 500 Index posted a 3.9% total return, representing the best quarter of the year for the U.S. stock market.   I n terms of S&P sector performance, only three of the 11 sectors posted gains, led by the Energy and Information Technology sectors, gaining 3.1% and 2.4%, respectively. The Information Technology sector was the best-performing sector for the quarter, gaining 12.9%, and outperformed the S&P 500 by over 900 basis points. The Tech sector's 21% weight in the S&P 500 helped the index stay positive for the month and post the best quarter of the year.

PERFORMANCE OF S&P 500 INDEX Total Returns for Periods Ended September 30, 2016 YTD

WEIGHTINGS

Information Technology Health Care Financials Consumer Discretionary Consumer Staples Industrials Energy Utilities Real Estate Materials Telecommunication Services

21.2% 14.7% 12.8% 12.5% 9.9% 9.7% 7.3% 3.3% 3.1% 2.9% 2.6%

Ranked by highest to lowest index weighting.

-5

0

5

10

15

20

1YR

25

30

GLOBAL EQUITIES   International developed markets moved slightly higher

in September, providing a positive gain to end the third quarter. After a year-to-date decline of 4.4% at the end of the second quarter, the MSCI EAFE Index rallied during the third quarter to record a year-to-date gain of 1.7%. Meanwhile, emerging markets advanced for the month, helped by rising commodity prices and accommodative monetary policies. In September, China reported surprisingly strong imports while exports fell less than expected. Russian stocks performed well for the month, helped by rising oil prices and signs that Russia is moving out of recession. Year-to-date, the MSCI Russia Index (not shown) returned 30.6%, in U.S. dollars.

PERFORMANCE OF MSCI EAFE INDEX Total Returns for Periods Ended September 30, 2016 YTD

WEIGHTINGS

Japan United Kingdom France Switzerland Germany Australia Hong Kong Netherlands Spain Sweden

1YR

23.3% 18.9% 9.7% 9.0% 9.0% 7.3% 3.5% 3.3% 3.0% 2.8%

Ranked by highest to lowest country weighting. -10 Returns are in U.S. dollars with dividends reinvested.

-5

0

5

10

15

20

25

FIXED INCOME RECAP   The U.S. fixed income markets were mixed for the 

month, as the outlook for the interest rate environment continued to evolve. During the month, investors considered several factors, including the decision by the Federal Reserve (Fed) to stand pat on raising interest rates. For the month, the Barclays U.S. Aggregate Bond Index posted a -0.1% total return and lowered its year-to-date gain to 5.8%.   U.S. municipal bonds experienced a modest slowdown in investor demand in September and posted their first negative monthly return since June 2015. Year-todate, the Barclays U.S. Municipal Bond Index posted a 4.0% total return. Over the longer 1- and 5-year time periods, municipal bonds returned 5.6% and 4.5% annualized, respectively.

U.S. BOND MARKET PERFORMANCE Total Returns for Periods Ended September 30, 2016 6%

Barclays 1-5 Year U.S. Treasury Index

3%

Barclays U.S. Aggregate Bond Index

0%

YTD

1 YR.

5 YR.

Barclays U.S. Municipal Bond Index

U.S. TREASURY YIELD CURVES 9/30/15

3%

12/31/15

9/30/16

2% 1% 0%

1 Mo.

5

3 Mo.

1 Yr.

2 Yrs.

5 Yrs.

10 Yrs.

20 Yrs.

30 Yrs.

MARKET COMMENTARY

The Changing Landscape of Retirement Income Sources Is it time to replace the three-legged stool? This analogy has been used to describe how individuals have traditionally relied on three retirement income legs: employer-provided pensions, Social Security benefits and personal savings, with each “leg” contributing roughly a third to investors’ financial security. Lately, though, it seems that ensuring sufficient income during retirement has never been more challenging, so maybe it’s time to retire the analogy. According to a recent survey by the Employee Benefit Research Institute, only 21 percent of workers say they are very confident they’ll be able to have a comfortable retirement.1 So how can you feel similarly confident about your retirement? With pensions growing scarce and future Social Security benefits potentially reduced, your personal savings are left to make up the difference. Unfortunately, many Americans are not as prepared as they could be. The accompanying chart shows that 42 percent of workers have saved less than $10,000 for retirement, while over half have accumulated less than $25,000 (the first and second bars combined).

50%

42%

40%

Meanwhile, the general consensus is that retirees will need around five to seven times their final salaries in savings to live off 70–80 percent of their pre-retirement income (on an annual basis). For a worker making $50,000 a year, that translates into a nest egg of $250,000–350,000. To arrive at that figure, a good rule of thumb is to save about 10 percent of your annual salary, or in this case, $5,000 per year. This, of course, depends on the amount of time left until retirement, along with how much money has already been saved. The good news is, you have the most control over this area. Although you can’t influence capital market returns, you can determine your investor behavior: when you start, and the frequency and size of your contributions. Plus, research shows this behavior component is a better predictor of investing success than market returns. Don’t panic if your investment plan seems to be falling short. It’s never too late to start, or adjust, your retirement savings strategy. State Farm is here to help get you started—and keep you investing—toward fulfilling your long-term personal savings goals.

A Majority of Workers Have Less Than $25,000 in Retirement Savings*

30%

12%

20%

10%

10%

12%

$25,000 – $49,000

$50,000 – $99,000

$100,000 – $249,000

14%

Source: Employee Benefit Research Institute-2016 Retirement Confidence Survey, March 2016

10% LESS THAN $10,000

$10,000 – $24,999

  Securities, insurance and annuity products are  not FDIC insured, are not bank guaranteed and are subject to investment risk, including possible loss of principal.   Past performance is no guarantee of future results.    It is not possible to invest directly in an index.    Investing involves risk, including potential for loss.    Bonds are subject to interest rate risk and may decline  in value due to an increase in interest rates.   The stocks of small companies are more volatile than  the stocks of larger, more established companies.   Foreign investments involve greater risks than U.S.  investments, including political and economic risks and the risk of currency fluctuations.   Emerging markets involve greater risks than U.S.  investments due to lower trading volume, political and economic instability, and other governmental limitations on foreign investment policy.   The S&P 500 Index tracks the common stock  performance of 500 large U.S. companies.

*Not including value of primary residence or defined benefit plan.

GREATER THAN $250,000

  Standard & Poor’s, S&P, and S&P 500 are registered  trademarks of Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies.   T he Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe and is a subset of the Russell 1000 Index.   The Russell 2000 Index tracks the common stock  performance of the 2,000 smallest U.S. companies in the Russell 3000 Index.   Russell Investments is the owner of trademarks, service  marks, and copyrights related to its respective indexes.   The Barclays U.S. Aggregate Bond Index represents  debt securities in the U.S. investment-grade fixed-rate bond market.   T he Barclays Municipal Bond Index is an unmanaged index representative of the tax-exempt bond market.   Neither State Farm nor its agents provides investment,  tax, or legal advice.

State Farm VP Management Corp. One State Farm Plaza, Bloomington, IL 61710-0001 1-800-447-4930

EBRI, 2016 Retirement Confidence Survey 1

  You could lose money by investing in the Money  Market Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.   This recap has been prepared by State Farm VP  Management Corp. for informational purposes. The information contained herein has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Any opinions discussed herein reflect our judgment as of the date of publication and are subject to change without notice. This material should not be considered a recommendation to purchase or sell any security.

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