July 18, 2013

Judith Ward Judith Ward, CFP®, is a senior financial planner and vice president of T. Rowe Price Investment Services.

The powerful new FuturePathSM financial resource from T. Rowe Price can give you the knowledge you need to achieve the retirement you envision.

Dreaming about the life you see for yourself in retirement can be an effective first step in your overall financial strategy. Think about the places you'd like to go, the pastimes and hobbies you want to pursue, and the visits to family that will fulfill your life. Although you may have committed to saving for retirement for many years, you may not have worked out the details and financial implications of your plans. It can be challenging to get a clear picture of exactly where you stand now—and where you will be in the future. But no matter what kind of retirement you have in mind, you'll want to know the answer to one question: Will my retirement income be enough to support my lifestyle?

A Couple Takes a Deeper Look at Their Financial Future

Consider Louis and Mary, a couple in their mid- to late 50s who are saving for retirement but juggling so many daily and near-term concerns that it's difficult for them to talk about the steps they could take now and the impact these would have on their future. What if Mary worked a few years longer? How would this change their future financial picture?

The couple has two children—a son finishing college and an older daughter who is planning to get married in a year. They have a mortgage that they plan to pay off by the time they retire, college tuition and car payments, and a love of travel—something they hope to do more often in retirement. At the same time, fully funding their son's final two years of college and paying for the wedding are important goals for them. They still have savings in a 529 plan, but not enough to cover the remaining tuition. Although they both think retiring at age 65 would be ideal, Mary is happy with her job and would consider working longer. The couple has outlined all of these details, but they don't know how their goals and decisions will all add up for retirement.

Let's take a look

Many individuals may have an idea about retirement but just haven't made the time to map out how they're going to get there, much less even discuss their thoughts with a spouse or partner. FuturePath provides a vision of the future to help people plan together and explore possibilities so they can be more assured as they near retirement.

Getting Focused

FuturePath brings clarity to the complexity of planning for retirement as you manage the demands of your life today. This retirement planning resource provides guidance as you consider the various decisions you'll need to make: when to retire, whether to save more or even less, and at what age to begin your Social Security benefits. After you enter information about your current circumstances and future plans, FuturePath gives you a Confidence Score to help you see how the actions you take can improve your retirement readiness. The resource can also help you and your spouse or partner have a conversation about the life you see for yourselves, the income needed to support that vision, and how you can realize your dreams.

Determining Your Retirement Outlook

Your current situation. FuturePath enables you to see how your retirement income may be affected by each of your decisions, such as choosing to save more, retire earlier, or work in retirement. The resource's projections are based on your current balances—in T. Rowe Price accounts and accounts held at other financial institutions—and financial details, including salary and savings rate.

What-if scenarios. FuturePath then estimates how your assets may change over time, based on a number of factors, including the amount of income you plan to withdraw during retirement. The online resource even allows investors to include financial considerations—such as additional income, health costs, or paying for a wedding—to help you visualize how those events may affect your retirement.

The adjustments. FuturePath then generates a Confidence Score on a scale up to 100. The Confidence Score suggests how confident you can be about your retirement planning goals by considering two primary risks: 1) the likelihood that your savings will last throughout your retirement; and 2) the likelihood that your portfolio will keep pace with inflation while reducing the impact of short-term market downturns. Current portfolio balances, asset allocations, annual savings, and desired retirement income, among other factors, contribute to the score. Changes made in any one area will affect the score, giving you a good idea of the potential impact your decisions can have.

Your Decisions Today, Your Income Tomorrow

No matter how near or far away from retirement you are, the actions you take now can have a lasting impact on your life ahead. The power of FuturePath lies in its ability to help you estimate and explore how the decisions you make today can shape your retirement. One overlooked decision-when and how to claim Social Security benefits-may be more complex than you think and have significant implications on your finances throughout the rest of your life.

Louis and Mary Define Their Goals

Louis and Mary provide their current information and have determined they could cover most of their anticipated expenses in retirement with $120,000 a year as a starting point. (FuturePath uses 75% of combined annual preretirement salary as a baseline, although users have the option to override it.) They are pleased to see a Confidence Score of 81, which helps them feel more assured they're on a good track. They begin to explore how their other goals may affect their future.

My Retirement Outlook

Marital Status: Married
Ages: 58 and 55, respectively
Children: Charlene, age 28; Thomas, age 20

Retirement Age Target: 65
Social Security Benefits-Target Age to Claim: 70
Retirement Income Target: $120,000

Recent Salary: $80,000
Contribution/Savings Rate: 10% + 3% employer match
Tax-Advantaged Assets: $450,000 in a 401(k);
$50,000 in a Roth IRA
Taxable Accounts: $60,000

Recent Salary: $120,000
Contribution/Savings Rate: 9% + 3% employer match
Tax-Advantaged Assets: $500,000 in a 401(k);
$25,000 in a Traditional IRA
Taxable Accounts: $75,000

This chart and the charts on the following pages illustrate how Louis and Mary's assets could evolve over time given their planning assumptions, including their asset allocation and contribution amount/percentage. Please note that this is not a prediction or projection of the future performance of any specific investment. Projections represent the median values calculated in the 1,000 market simulations run, meaning up to half of the projected balances shown may exceed these values and half may be lower. This includes the possibility that assets could be depleted earlier than is shown in the chart. Neither the assets, nor income, nor investment returns are guaranteed. Since the future value of a portfolio depends on investment returns, it is impossible to say exactly how it will evolve over time, or how long assets will last. Projected assets and income do not take into account any taxes that may be due upon withdrawal. This example and its assumptions are for illustrative purposes only.

Scenario 1: What if Louis and Mary Pay for College and a Wedding

Financial Event: They include their son's remaining college costs: $40,000.
Financial Event: They pay for their daughter's wedding: $30,000.
Louis decides to begin taking Social Security benefits earlier-at age 65-even though his benefit payment would be higher if he waited until age 70.

The couple makes no other changes and sees their Confidence Score decline to 76.

Some of the suggestions FuturePath offers on how to increase a Confidence Score are to increase their contributions and/or consider delaying retirement. They raise their contribution amount and are glad to see their score increase to 77. This scenario, however, compromises their retirement income objectives.

FuturePath Louis and Mary Scenario 1: College and Wedding

Scenario 2: What if Mary Retires Later?

Building on the last scenario, with college and wedding paid for and contribution rates increased, Mary considers how working to age 68 and delaying her Social Security benefits to age 70 may look: The couple's score rises to 89. And if she worked even two years longer, to age 70, their score would jump to 93. The added income and the increase in Social Security payments make a significant difference in their projected income.

FuturePath Louis and Mary Scenario 2: Mary Retires Later