Your ability to save is tied to discipline and establishing a plan of action, not your income level.

There is an old saying, “It’s not how much you make that counts, but how much you keep.” In today’s society of instant gratification and conspicuous consumption, it is hard not to be enticed to spend your money on luxury items you could probably live without. Purchasing the latest cell phone technology or upgrading your television may seem like a good idea today, but can work against your long-term goals. By applying a little discipline, you could just as easily save this money and find that the long-term rewards of saving far outweigh the short-term enjoyment your purchase may bring.

The first step toward disciplined saving is to evaluate your current financial situation and take the time to set some saving goals for yourself. Think of it as drawing a map leading to a buried treasure — and your reward is a nice retirement nest egg!

Once you’ve established a plan, a great way to stay on track is to have money deducted directly from your paycheck — you won’t miss it if you never see it! One way to do this to take advantage of the salary deferrals under the State of Maine’s Deferred Compensation Plan (the “Plan”). Each year the Plan allows you to save a portion of your taxable pay through convenient payroll deductions, up to the annual IRS maximum ($15,000 for 2006 and $15,500 for 2007).

For more information about the Plan go to www.maine.gov/beh or call the Plan Administrator at 207-287-3126.

Maximize the use of tax-advantaged accounts.

Using tax-advantaged accounts should be an important part of any wealth-building plan. Several types of tax-advantaged accounts are available, including Individual Retirement Accounts (IRAs), certain annuities, and the State of Maine’s Deferred Compensation Plan. By contributing to the Plan, you can reduce the amount of your current taxes because your contributions are made with pre-tax dollars. This means these contributions are deducted from your pay before federal income takes are withheld and are not included in your income for tax purposes. In addition, your account grows tax deferred because you don’t pay any taxes on the earnings from your investments until you receive a distribution after you terminate your employment. And, since most people will be in a lower tax bracket after they terminate than when they made their contributions to the Plan, this will result in both deferred and reduced taxes.

Your investments need to outpace inflation.

Once you have put your savings strategy into high gear with the last two wealth-building keys, you will need to make some investment decisions. One of the most important aspects of long-term investing is that your investments outpace inflation.

Inflation is defined as the increase in the cost of goods over time and it’s easy to see some real life examples. If you think back to your childhood and recall the price of items back then, compared to what they cost today, you can see inflation at work. A $10 movie ticket, a 75¢ candy bar or a 39¢ US postage stamp are all good examples of the impact inflation has over the long term. Inflation has averaged around 3% a year over the last 70 years.

Inflation erodes your purchasing power each year by driving up the cost of goods. To combat this your investments need to earn at least 3% a year just to stay even with inflation. If your money is not growing at a rate faster than inflation, you may not be able to maintain your lifestyle or afford the same goods and services in the future.

Certain investments have a track record of outpacing inflation by a higher margin over the years than others. The following chart illustrates the average annual increase in the hypothetical value of $1 invested in 1925. The annual increase or return shown assumes that any earnings on the money were reinvested in the same manner as the original $1. For example, if the first dollar was invested in stocks in 1925, all future earnings attributable to that dollar were invested in stocks, as well. The example does not factor in any transaction costs or taxes. Remember, past performance does not guarantee or predict future results.

1 (Source: U.S. Bureau of Labor Statistics), 2 (Treasury Bills), 3 (Long-Term Gov’t Bonds), 4 (S&P 500 Composite Stock Index)

Your FSO can help you implement an investment strategy that is appropriate for your personal circumstances and financial goals.

Time is more important than timing, when it comes to investing.

Successful investing over the long term has more to do with the amount of time you are invested in the market, and less to do with trying to time the ups and downs of the stock market. Market timing is a strategy in which an investor attempts to be invested in the stock market during times of higher returns and move out before the market has lower or even negative returns. It’s a complex process, and the timing has to be perfect for the strategy to work. For example, the investor would need to have his or her money invested in the market when it is performing well, so as not to miss out on the higher returns. This can be a very tough task based on the speed at which markets move today and the numerous forces that can impact the market.

If you are investing for the long term, it may make more sense to avoid trying to time the market and to remain focused on investing your money as early as possible to enjoy the growth and compounding that only time can provide. To illustrate this point, take a look at the following example and how missing some of the market peaks over the last 30 years could have cost someone who was market timing with less than perfect accuracy.

Let’s compare “Jumpy Joe” (a market timer who switched back and forth between stocks and cash investments) to “Steady Eddie” (who left his money untouched in stocks) over the last 30 years. We will assume they both started with $1,000 back in 1976 but followed different investing philosophies. Joe tried to time the market but wasn’t entirely successful. As a result of his switches between stock and cash investments, he missed the 10 best performing months over the 30-year period. Meanwhile, Eddie left his money invested in stocks and did not try to capitalize on the market ups and downs that occurred over the 30-year period.

The Pitfalls of Market Timing

As you can see in the table, Steady Eddie’s investment results exceeded Jumpy Joe’s by a significant amount.

(Source: Standard & Poor’s. S&P 500 Composite Stock Index represents stocks. The S&P 500 Index is an unmanaged index generally considered to be representative of the U.S. stock market.)

This example is based on past performance. It cannot be used to guarantee or predict future performance, but it does tell an interesting story. Market timing can be risky and may not work to your advantage over the long term. It’s important to remember that considerable wealth can be built over long periods of time simply by leaving your money invested in the market — this growth generally has little to do with correctly timing the market.

Investing in a single asset class may not be the right strategy for you. You may want to consider diversifying your portfolio in different types of investments to include stocks, bonds and cash, as well. This can help to smooth out the ups and downs of the different areas of the market and lower your account’s overall risk level through the years. Please see your FSO for help with this and other investment strategies.

Hopefully these wealth-building tips can help you to secure long-term financial security and a happy retirement.

Investment Fund Details

IMPORTANT NOTE: The information presented here is not intended as investment advice. Its purpose is to help you understand the investment options available through the State of Maine Deferred Compensation Plan. Your financial strategy and investment choices are entirely your own and should reflect your personal needs and circumstances. State of Maine personnel, by federal law, cannot provide investment advice. For more information, you may want to consult with a professional financial advisor. The investment information shown is current as of September 30, 2006.

Results are historical and not intended to portray future performance. Current performance may be less than figures shown. Investment benchmarks (shown in italic) may differ from the benchmarks provided in the funds’ prospectuses.

Please note for charts below and to the right, Fixed Accounts (noted with an “*” in the “Rates of Return” column) provide a specified rate of return. For current rates, along with an explanation of how they are determined, contact your financial services organization.

Important Information about the Timing of Deferral Elections

The State of Maine’s Deferred Compensation Plan permits you to defer a portion of your current salary through convenient payroll deductions. You can enroll or change the amount you contribute at any time.

Because your contributions are deducted automatically from your paycheck, the effective date of your deferral election — whether it’s an election to begin contributing or an election to change the amount you defer — is tied to your pay cycle. If you are already employed, the earliest your election to enroll or to change your contribution amount can take effect would be with your first paycheck in the month following the month in which your form (Joinder/Deferral Agreement) is received. For example, if your form is received on December 15, 2006, the earliest your election will take effect would be with the first paycheck you receive in January 2007.

However, if you are a new employee, you can make an election to defer after the first day of the month in which you are hired and have that election take effect in your first paycheck. To do so, your completed enrollment form must be received before the first day of the month on which you begin working for the employer.

For more information about the Plan you can go to www.maine.gov/beh, or call the Plan Administrator at 207-287-3126. In addition, you can visit one of the websites shown below for the available financial services organizations (FSOs): The Hartford, ING Financial Advisers, LLC and AIG VALIC.

Advisory Council on Tax Deferred Arrangements