As you build your retirement portfolio, the risk of outliving your retirement assets should be your key consideration. In order to potentially generate an appropriate level of growth, you need to pay close attention to your investment allocation.

Maintaining and adjusting your portfolio takes time, and choosing the right securities can be challenging. The T. Rowe Price Retirement Funds are designed to simplify the investment selection process for you, offering active management and continuous adjustments. Underlying mutual fund selections and changes are carefully and consistently reviewed and approved by a highly tenured Advisory Board of investment professionals, and fund allocation shifts continue for 30 years after each fund's target date.

The Retirement Funds can help ensure an appropriate allocation based on your time horizon—the number of years until you will need to begin using the assets and the amount of time you will need to draw on your investments. Each professionally managed fund provides a prepackaged strategy—a mix of stock and bond mutual funds—that determines a fund's base asset allocation according to an investor's age. When selecting a fund, you choose the fund date that is closest to the year you will turn (or turned) age 65. For example, an individual who reached age 66 in 2010 would select the 2010 fund, and an investor who is age 46 this year would choose the 2030 fund.

Investing for Growth Potential

Not all target-date funds are alike. For example, the T. Rowe Price Retirement Funds hold more substantial allocations to stocks than many other target-date funds. While past performance cannot guarantee future results, equities historically have produced higher long-term returns than other asset classes and have the best chance of beating inflation over time. "We believe that over the long term, even for investors already in retirement, a portfolio should include a healthy percentage of stocks, despite their higher level of market risk," explains Jerome Clark, portfolio manager of the T. Rowe Price Retirement Funds. "The longer time horizons of these funds, even for those already in retirement, may give investors time to ride out short-term market fluctuations and periodic market corrections."

The underlying funds in each of the T. Rowe Price Retirement Funds are diversified across a range of categories. Stock funds include domestic large-, mid-, and small-cap growth and value funds, as well as international growth and value funds. Underlying bond funds are spread across investment grade and high yield and include exposure to international (developed and emerging market) bond funds.

What's more, maintaining a well-diversified portfolio is likely to be much more effective than trying to jump into and out of particular assets at the right times. Many studies suggest that investors trying to time the market are prone to choosing precisely the wrong times to get in or out of a particular asset. For example, investors pulled billions of dollars out of equity mutual funds in early 2009,1 causing them to miss that year's dramatic stock market rebound. Of course, diversification cannot assure a profit or protect against loss in a declining market.

Enhancements to Provide Inflation Protection

The T. Rowe Price Retirement Funds recently expanded their investment lineup to include exposure to funds that may help reduce long-term volatility without lowering long-term growth potential. First, in the equity allocation, the funds added the T. Rowe Price Real Assets Fund, which invests in stock of companies that own or have significant exposure to natural resources, real estate, metals and mining, infrastructure, energy, and other commodities. These investments have tended to respond more favorably to rising inflation levels than a broad equity index, such as the S&P 500, would. As a result, the addition of the Real Assets Fund may help benefit performance in the Retirement Funds if inflation rises from its current, historically low levels.

Second, the existing T. Rowe Price Short-Term Income Fund has been renamed the Inflation Focused Bond Fund, which targets rising prices by investing in inflation-indexed bonds, such as Treasury inflation protected securities (TIPS). The focus on TIPS is intended to help investors maintain an inflation-adjusted withdrawal stream through their retirement years. "Our research shows that these types of real assets and inflation protected bonds should reduce overall portfolio volatility by dampening the effect of inflationary trends over the long term," notes Clark.

Please note that the Real Assets and Inflation Focused Bond Funds are not available for direct investment by the public.

Letting the Funds Work for You

Like many investors, one of your goals may be to develop a successful investment strategy that will help you build enough financial security to see you through decades of retirement. Target-date funds offer a unique way to balance your investments with your time horizon while also offering an easy and maintenance-free way to diversify your portfolio. Clark says, "At T. Rowe Price, we remain committed to building an asset allocation strategy that focuses on helping investors maintain an income stream throughout a potentially lengthy retirement."

Staying in the Market

Many investors think that vastly reducing—or eliminating—their stock holdings is the right thing to do when they retire. However, many experts believe that a substantial allocation to equities will help you to maintain a stronger income stream over your entire retirement.

Staying in the Market

1Investment Company Institute.

The principal value of the Retirement Funds is not guaranteed at any time, including at or after the target date, which is the approximate date when investors turn age 65. The funds invest in a broad range of underlying mutual funds that include stocks, bonds, and short-term investments and are subject to the risks of different areas of the market. The funds emphasize potential capital appreciation during the early phases of retirement asset accumulation, balance the need for appreciation with the need for income as retirement approaches, and focus more on income and principal stability during retirement. The funds maintain a substantial allocation to equities both prior to and after the target date, which can result in greater volatility.