Take Advantage of Interest-Rate Fluctuations

Retirement and Investments at OCTFCUThe Financial Guidance You NeedPlanning your financial future can be confusing and overwhelming. As a Member of thecredit union, you have a team of 10 financial advisors, licensed and registered throughCUSO Financial Services, L.P., our broker dealer,* with more than 120 years of combinedexperience. We will take time to listen to your goals and objectives, and help you developa financial plan tailored to your needs.

A Full Range of OptionsOne of the benefits of having financial advisors at the credit union is that we have accessto both insured and uninsured savings and investment products. We can help you with anOCTFCU share certificate just as easily as we can put together an investment portfolio.And for classified and certificated educators, we can help you develop your 403(b) or 457 retirement plan.

Available at Your BranchAs important as financial planning is to your future, it often gets pushed aside. To helpmake financial planning more convenient, our Financial Advisors are as close as yournearest branch. Call 714/258-4000 or 800/4OCTFCU to schedule a complimentaryappointment.

4

* Investment products and services offered through CUSOFinancial Services, L.P. (CFS) are not NCUA/NCUSIF insured, not Credit Union guaranteed, and may lose value. FinancialAdvisors are employed by OCTFCU and registered through CFS.OCTFCU is in partnership with CFS. (Member NASD/SIPC)

Issue Highlights

Don’t Forget Your Beneficiaries . . . . . . . . . . . . . . . . . . . . 2

How the Windfall Elimination ProvisionAffects Educators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Errors That Add Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Retirement and Investments at OCTFCU . . . . . . . . . . . . 4

Errors That Add UpIf an investor made the same investment mistake year after year for 35 years, the eventual cost of these errors could be quite significant.

MichaelGranja

With Michael, you canhave the best of bothworlds: professionalguidance and theexceptional serviceyou expect from yourCredit Union.

Michael came toOCTFCU in 2004 as aseasoned financialadvisor, having workedat CalFed, Citibank,and California NationalBank for 15 years.

Michael Granja isavailable to meet withMembers at the Santa Ana Branch.

The 0%-interest-rate party seems to be winding down. After nearlyfour years of paying low interest on auto loans and mortgages,Americans are again seeing upward pressure on these and othertypes of debt.

The Federal Reserve boosted key short-term rates in June 2004with the promise that more increases would follow. But thecorrelation between the Fed’s actions and the path of consumerinterest rates has been murky. For example, the Fed raised short-term rates 10 consecutive times from June 2004 throughAugust 2005, yet 30-year mortgage rates remained flat — and evenfell slightly — during the period.1

Interest-rate fluctuations can be puzzling to the average person andeven to some experts. Do you know how your portfolio might beaffected by rising rates? If no answer leaps to mind, you might be agood candidate for a bond mutual fund.

Consider Bond Mutual FundsOne of the most important benefits offered by a bond mutual fund isprofessional management. Bond fund managers are experienced inthe bond market. They carefully research, select, and supervise allthe debt their funds hold, buying and selling bonds in an effort to

Featured Advisor

Step by Step

continued on page 2

Members can register to receive Trusted Advisorby logging on to online banking or by calling us at 714/258-4000 or 800/4OCTFCU, option 5.

September/October 2005

Trusted AdvisorSmart Planning Starts Today

We PutEducators

First.

The Federal Reserve has steadilyincreased the federal funds target rate,which has the potential to influence many other types of interest rates.

Source: Federal Reserve, 2005

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0%6/04 8/04 9/04 11/04 12/04 2/05 3/05 5/05 6/05 8/05

3.5%

1.25%

No equity investments: $592,0001

Failing to diversify: $418,0002

Chasing performance: $127,0003

Saving too little: $127,0004

Source: Money, December 2004. This exampleis based on a 30-year-old investor earning$50,000 who saved 7% annually for retirement(with 3% annual raises) for 35 years, with thepotential of earning 8% a year and ultimatelyaccumulating $1,042,189 by age 65.

1 Funds invested in a risk-free money marketfund rather than the equity markets.

2, 3 Investors who fail to diversify or who chasehot stocks underperform the market byapproximately the same amount. Assumesperformance chasers continually purchased the prior year’s top-performing stocks.

4 Savings rate remained fixed at 7%.

OCTFCU_sep_oct_2005.qxd 8/16/05 2:46 PM Page 1

3

If you have worked both as a publicemployee in a position not covered bySocial Security and in a position in whichyou paid Social Security taxes (even part-time jobs or during the summers),you may be affected by the WindfallElimination Provision (WEP).

The WEP is a federal law that may causeeducators to lose a significant portion oftheir earned Social Security benefits. Asmany as 635,000 retired governmentretirees are now affected by the WEP —including many teachers, police, andfirefighters — and that number grows byaround 60,000 each year.1

Social Security benefits are based on aworker’s average monthly earnings,adjusted for inflation. Workers who haveearned low wages generally are entitledto receive a higher replacement ratebecause they earned less over theircareers. Lower-paid workers typically

receive a benefit equal to about 55% of their pre-retirement earnings,whereas the average replacement rate for high wage-earners is about25%. But for those who are also receiving a public pension and haveless than 30 years of substantial earnings under Social Security, theWEP kicks in and reduces the Social Security benefit to eliminate thepotential “windfall.” This can be particularly onerous for teachers andother government workers.

The WEP reduces the factor by which average earnings are multipliedto determine Social Security benefits (the factor amount variesdepending on when the individual becomes eligible to retire and thenumber of years of earnings accumulated). In the modified calculation(for a worker who turns 62 in 2005), the first $627 of average monthlyearnings, which would normally be multiplied by 90%, drops to as lowas 40%. Even a small public pension can trigger the WEP and canreduce a retiree’s Social Security benefit by as much as $313 permonth, or more than $3,600 per year.2

Congress has debated the fairness of the WEP and could somedayreform or repeal this rule, which was enacted almost 20 years ago. In the meantime, teachers and others who might be affected shouldremember the WEP when planning for retirement.

1) The American Federation of State, County & Municipal Employees, 20052) Social Security Administration, 2005

Don’t Forget Your BeneficiariesHow the Windfall Elimination ProvisionAffects Educators

We Put Educators First.

2

maximize a fund’s returnbased on its objectives.Fund managers work to helpyou profit from — andprotect your investment from— changes in interest rates.

If you are concerned about

how the latest rate increases

will affect you, please call an

OCTFCU Financial Advisor,

registered through CUSO

Financial Services, L.P.

Our goal is to help you

evaluate your portfolio.

Mutual funds are sold only byprospectus. Please considerthe investment objectives,risks, charges, and expensescarefully before investing. The prospectus, whichcontains this and otherinformation about theinvestment company, can be obtained from yourfinancial professional. Be sure to read the prospectuscarefully before decidingwhether to invest.

Bond funds are subject tothe interest-rate, inflation,and credit risks associatedwith the underlying bonds inthe fund. As interest ratesrise, bond prices typicallyfall, which can adverselyaffect a bond fund’sperformance. The principalvalue of bonds and bondfunds fluctuates withchanges in marketconditions. When sold, theymay be worth more or lessthan their initial cost.

1) Haver Analytics, 2005

Interest-Rate Fluctuations(continued from page 1)

In 2004, 40% of American householdsowned individual retirement accounts(IRAs), and 401(k) plan assets werenearing $2 trillion.1 For many of theseAmericans, retirement plans make up alarge portion of their assets and representa significant part of their estates. One wayto help protect these funds is by keepingbeneficiary designations up to date.

You may not realize it, but the assets in your 403(b) retirement accounts are not distributed based on instructions inyour will. Rather, they are directed to thebeneficiaries you designated for each account. If no beneficiary is named, the defaultbeneficiary may be your estate, making the assets subject to both income and estate taxes.

Distributions from most tax-deferred retirement plans are taxed as ordinary income and, if taken prior to reaching age 591/2, may be subject to an additional 10% federal income tax penalty.

Family TiesIf there have been changes in your family, such asthe birth of children, a death, or a divorce, it may betime to revisit your beneficiary designations todetermine whether changes are needed. Updatingthe beneficiary designation forms for your accountsmay help prevent confusion and discord among your heirs.

Types of BeneficiariesMost retirement plans allow you to designate aprimary and a contingent (secondary) beneficiary. If your primary beneficiary passes away before youdo, your accounts will be distributed to thecontingent beneficiary.

You can also request that your funds be dividedequally between two or more children, or you canspecify a specific percentage to be distributedamong multiple heirs.

By keeping your account beneficiary designationscurrent, you can help ensure that your assets aredistributed as you wish. This may help preserveassets for your heirs and avoid family frustration later.

1) Investment Company Institute, 2005

Consider This...

It’s helpful to take the following into account when naming beneficiaries.

� Age of beneficiary

Most plans will not transferassets directly to a minorwithout a court-approvedtrustee or guardian.

� Beneficiary’s ability to manage assets One option to help ensurecompetent management ofassets is to set up a trust inthe person’s name anddesignate a trustee tomanage the funds.

� The fine print

By law, a spouse must benamed the primarybeneficiary of a pension plan,unless waived by the spousein writing.

WEP = Penalty for Public Service This hypothetical example illustrates how the WEP can affect theSocial Security benefits of some retirees who also receive agovernment pension. It assumes that Joe and Paula worked inprivate industry for 20 years, after which Joe retired. Paulacontinued to work 5 additional years as a teacher and earned agovernment pension, which triggered the WEP.

Average Joe Paula PensionerAverage wage: $4,000/month Average wage: $4,000/month

Normal benefit formula:* Modified benefit formula:*$627 x .90 = $564.30 $627 x .40 = $250.80$3,152 x .32 = $1,008.64 $3,152 x .32 = $1,008.64$221 x .15 = $33.15 $221 x .15 = $33.15

Monthly SocialSecurity benefit: $1,606.09 vs. $1,292.59

Source: Social Security Administration *Social Security benefits are based on a worker’s lifetime average earnings (covered bySocial Security), adjusted for inflation. To compute benefits, the average earnings areseparated into three amounts, and the amounts are multiplied using three factors. The first level of earnings is normally multiplied by 90%, the second by 32%, and the third by15%. The modified WEP formula reduces the 90% factor to an amount that ranges from40% (20 or fewer years under Social Security) to 85% (29 years under Social Security).This hypothetical example is based on the formula for individuals who turned 62 in 2005and worked 20 years with “substantial” earnings subject to Social Security.

OCTFCU_sep_oct_2005.qxd 8/16/05 2:46 PM Page 2

3

If you have worked both as a publicemployee in a position not covered bySocial Security and in a position in whichyou paid Social Security taxes (even part-time jobs or during the summers),you may be affected by the WindfallElimination Provision (WEP).

The WEP is a federal law that may causeeducators to lose a significant portion oftheir earned Social Security benefits. Asmany as 635,000 retired governmentretirees are now affected by the WEP —including many teachers, police, andfirefighters — and that number grows byaround 60,000 each year.1

Social Security benefits are based on aworker’s average monthly earnings,adjusted for inflation. Workers who haveearned low wages generally are entitledto receive a higher replacement ratebecause they earned less over theircareers. Lower-paid workers typically

receive a benefit equal to about 55% of their pre-retirement earnings,whereas the average replacement rate for high wage-earners is about25%. But for those who are also receiving a public pension and haveless than 30 years of substantial earnings under Social Security, theWEP kicks in and reduces the Social Security benefit to eliminate thepotential “windfall.” This can be particularly onerous for teachers andother government workers.

The WEP reduces the factor by which average earnings are multipliedto determine Social Security benefits (the factor amount variesdepending on when the individual becomes eligible to retire and thenumber of years of earnings accumulated). In the modified calculation(for a worker who turns 62 in 2005), the first $627 of average monthlyearnings, which would normally be multiplied by 90%, drops to as lowas 40%. Even a small public pension can trigger the WEP and canreduce a retiree’s Social Security benefit by as much as $313 permonth, or more than $3,600 per year.2

Congress has debated the fairness of the WEP and could somedayreform or repeal this rule, which was enacted almost 20 years ago. In the meantime, teachers and others who might be affected shouldremember the WEP when planning for retirement.

1) The American Federation of State, County & Municipal Employees, 20052) Social Security Administration, 2005

Don’t Forget Your BeneficiariesHow the Windfall Elimination ProvisionAffects Educators

We Put Educators First.

2

maximize a fund’s returnbased on its objectives.Fund managers work to helpyou profit from — andprotect your investment from— changes in interest rates.

If you are concerned about

how the latest rate increases

will affect you, please call an

OCTFCU Financial Advisor,

registered through CUSO

Financial Services, L.P.

Our goal is to help you

evaluate your portfolio.

Mutual funds are sold only byprospectus. Please considerthe investment objectives,risks, charges, and expensescarefully before investing. The prospectus, whichcontains this and otherinformation about theinvestment company, can be obtained from yourfinancial professional. Be sure to read the prospectuscarefully before decidingwhether to invest.

Bond funds are subject tothe interest-rate, inflation,and credit risks associatedwith the underlying bonds inthe fund. As interest ratesrise, bond prices typicallyfall, which can adverselyaffect a bond fund’sperformance. The principalvalue of bonds and bondfunds fluctuates withchanges in marketconditions. When sold, theymay be worth more or lessthan their initial cost.

1) Haver Analytics, 2005

Interest-Rate Fluctuations(continued from page 1)

In 2004, 40% of American householdsowned individual retirement accounts(IRAs), and 401(k) plan assets werenearing $2 trillion.1 For many of theseAmericans, retirement plans make up alarge portion of their assets and representa significant part of their estates. One wayto help protect these funds is by keepingbeneficiary designations up to date.

You may not realize it, but the assets in your 403(b) retirement accounts are not distributed based on instructions inyour will. Rather, they are directed to thebeneficiaries you designated for each account. If no beneficiary is named, the defaultbeneficiary may be your estate, making the assets subject to both income and estate taxes.

Distributions from most tax-deferred retirement plans are taxed as ordinary income and, if taken prior to reaching age 591/2, may be subject to an additional 10% federal income tax penalty.

Family TiesIf there have been changes in your family, such asthe birth of children, a death, or a divorce, it may betime to revisit your beneficiary designations todetermine whether changes are needed. Updatingthe beneficiary designation forms for your accountsmay help prevent confusion and discord among your heirs.

Types of BeneficiariesMost retirement plans allow you to designate aprimary and a contingent (secondary) beneficiary. If your primary beneficiary passes away before youdo, your accounts will be distributed to thecontingent beneficiary.

You can also request that your funds be dividedequally between two or more children, or you canspecify a specific percentage to be distributedamong multiple heirs.

By keeping your account beneficiary designationscurrent, you can help ensure that your assets aredistributed as you wish. This may help preserveassets for your heirs and avoid family frustration later.

1) Investment Company Institute, 2005

Consider This...

It’s helpful to take the following into account when naming beneficiaries.

� Age of beneficiary

Most plans will not transferassets directly to a minorwithout a court-approvedtrustee or guardian.

� Beneficiary’s ability to manage assets One option to help ensurecompetent management ofassets is to set up a trust inthe person’s name anddesignate a trustee tomanage the funds.

� The fine print

By law, a spouse must benamed the primarybeneficiary of a pension plan,unless waived by the spousein writing.

WEP = Penalty for Public Service This hypothetical example illustrates how the WEP can affect theSocial Security benefits of some retirees who also receive agovernment pension. It assumes that Joe and Paula worked inprivate industry for 20 years, after which Joe retired. Paulacontinued to work 5 additional years as a teacher and earned agovernment pension, which triggered the WEP.

Average Joe Paula PensionerAverage wage: $4,000/month Average wage: $4,000/month

Normal benefit formula:* Modified benefit formula:*$627 x .90 = $564.30 $627 x .40 = $250.80$3,152 x .32 = $1,008.64 $3,152 x .32 = $1,008.64$221 x .15 = $33.15 $221 x .15 = $33.15

Monthly SocialSecurity benefit: $1,606.09 vs. $1,292.59

Source: Social Security Administration *Social Security benefits are based on a worker’s lifetime average earnings (covered bySocial Security), adjusted for inflation. To compute benefits, the average earnings areseparated into three amounts, and the amounts are multiplied using three factors. The first level of earnings is normally multiplied by 90%, the second by 32%, and the third by15%. The modified WEP formula reduces the 90% factor to an amount that ranges from40% (20 or fewer years under Social Security) to 85% (29 years under Social Security).This hypothetical example is based on the formula for individuals who turned 62 in 2005and worked 20 years with “substantial” earnings subject to Social Security.

OCTFCU_sep_oct_2005.qxd 8/16/05 2:46 PM Page 2

Take Advantage of Interest-Rate Fluctuations

Retirement and Investments at OCTFCUThe Financial Guidance You NeedPlanning your financial future can be confusing and overwhelming. As a Member of thecredit union, you have a team of 10 financial advisors, licensed and registered throughCUSO Financial Services, L.P., our broker dealer,* with more than 120 years of combinedexperience. We will take time to listen to your goals and objectives, and help you developa financial plan tailored to your needs.

A Full Range of OptionsOne of the benefits of having financial advisors at the credit union is that we have accessto both insured and uninsured savings and investment products. We can help you with anOCTFCU share certificate just as easily as we can put together an investment portfolio.And for classified and certificated educators, we can help you develop your 403(b) or 457 retirement plan.

Available at Your BranchAs important as financial planning is to your future, it often gets pushed aside. To helpmake financial planning more convenient, our Financial Advisors are as close as yournearest branch. Call 714/258-4000 or 800/4OCTFCU to schedule a complimentaryappointment.

4

* Investment products and services offered through CUSOFinancial Services, L.P. (CFS) are not NCUA/NCUSIF insured, not Credit Union guaranteed, and may lose value. FinancialAdvisors are employed by OCTFCU and registered through CFS.OCTFCU is in partnership with CFS. (Member NASD/SIPC)

Issue Highlights

Don’t Forget Your Beneficiaries . . . . . . . . . . . . . . . . . . . . 2

How the Windfall Elimination ProvisionAffects Educators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Errors That Add Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Retirement and Investments at OCTFCU . . . . . . . . . . . . 4

Errors That Add UpIf an investor made the same investment mistake year after year for 35 years, the eventual cost of these errors could be quite significant.

MichaelGranja

With Michael, you canhave the best of bothworlds: professionalguidance and theexceptional serviceyou expect from yourCredit Union.

Michael came toOCTFCU in 2004 as aseasoned financialadvisor, having workedat CalFed, Citibank,and California NationalBank for 15 years.

Michael Granja isavailable to meet withMembers at the Santa Ana Branch.

The 0%-interest-rate party seems to be winding down. After nearlyfour years of paying low interest on auto loans and mortgages,Americans are again seeing upward pressure on these and othertypes of debt.

The Federal Reserve boosted key short-term rates in June 2004with the promise that more increases would follow. But thecorrelation between the Fed’s actions and the path of consumerinterest rates has been murky. For example, the Fed raised short-term rates 10 consecutive times from June 2004 throughAugust 2005, yet 30-year mortgage rates remained flat — and evenfell slightly — during the period.1

Interest-rate fluctuations can be puzzling to the average person andeven to some experts. Do you know how your portfolio might beaffected by rising rates? If no answer leaps to mind, you might be agood candidate for a bond mutual fund.

Consider Bond Mutual FundsOne of the most important benefits offered by a bond mutual fund isprofessional management. Bond fund managers are experienced inthe bond market. They carefully research, select, and supervise allthe debt their funds hold, buying and selling bonds in an effort to

Featured Advisor

Step by Step

continued on page 2

Members can register to receive Trusted Advisorby logging on to online banking or by calling us at 714/258-4000 or 800/4OCTFCU, option 5.

September/October 2005

Trusted AdvisorSmart Planning Starts Today

We PutEducators

First.

The Federal Reserve has steadilyincreased the federal funds target rate,which has the potential to influence many other types of interest rates.

Source: Federal Reserve, 2005

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0%6/04 8/04 9/04 11/04 12/04 2/05 3/05 5/05 6/05 8/05

3.5%

1.25%

No equity investments: $592,0001

Failing to diversify: $418,0002

Chasing performance: $127,0003

Saving too little: $127,0004

Source: Money, December 2004. This exampleis based on a 30-year-old investor earning$50,000 who saved 7% annually for retirement(with 3% annual raises) for 35 years, with thepotential of earning 8% a year and ultimatelyaccumulating $1,042,189 by age 65.

1 Funds invested in a risk-free money marketfund rather than the equity markets.

2, 3 Investors who fail to diversify or who chasehot stocks underperform the market byapproximately the same amount. Assumesperformance chasers continually purchased the prior year’s top-performing stocks.

4 Savings rate remained fixed at 7%.

OCTFCU_sep_oct_2005.qxd 8/16/05 2:46 PM Page 1