Longevity risk. In recent years, rising life expectancies have exacerbated the third major retirement threat, known as longevity risk—the chance that you will outlive your savings. For a healthy couple both age 65, there is a 52% chance that one or both will live to be 92 and a 36% chance that one will live to age 95, according to data from the Society of Actuaries. These increasing life spans are why T. Rowe Price Retirement Funds were designed to address the possibility of a 30-year retirement.
THE RESEARCH BEHIND THE FUNDS
As the funds were being developed, extensive research conducted by fund managers and analysts supported the premise that greater exposure to equities increased the chance of saving enough money to last over a 30-year retirement. As a result, the Retirement Funds' investing strategy calls for maintaining a significant exposure to equities up to and through retirement.
The T. Rowe Price Retirement 2010 Fund, for example, maintains a 55% equity stake, compared with an average 43% equity stake for other 2010 retirement funds, according to Morningstar.1 "We came to a 55% equity allocation at retirement because it may help improve your chances of combating longevity and inflation risk," Clark says. "But you're also not facing an inappropriate level of market risk. This allocation strikes that balance."
The funds' asset allocations are automatically adjusted over time to maintain a mix of equities and fixed income investments appropriate for your age. Because T. Rowe Price Retirement Funds continue to adjust that allocation after the target date, investors don't have to seek new investment vehicles upon retirement. The same retirement fund provides an appropriate mix of income and capital appreciation potential throughout retirement.
MAKING THE RIGHT INVESTMENTS
Your savings rate is the primary factor that determines whether you will have enough money for a comfortable retirement. However, it also is critical to select the appropriate mix of investments in order to give yourself the best opportunity to accumulate enough assets to support a long retirement.
Asset allocation. The Retirement Funds invest in up to 19 other
T. Rowe Price mutual funds, seeking a balance among asset classes, investing styles, and geographic markets. The T. Rowe Price Retirement 2025 Fund, for example, includes exposure to U.S. large, mid-size, and small company stocks, as well as international equities from developed and emerging markets. On the fixed income side, the portfolio is exposed to both U.S. Treasuries and high yield domestic bonds, as well as a mix of bonds from emerging and developed international markets. Notes Clark, "We want to achieve a very high level of diversification."
Clark and his team make their investment decisions in conjunction with
T. Rowe Price's Asset Allocation Committee, a group of 12 of the firm's most experienced investment professionals. This committee studies global events, market trends, and other data to anticipate the relative strengths and weaknesses of various asset classes over a 6- to 18-month period. They also model risk/return scenarios to make recommendations for tactical asset allocation adjustments to address current market conditions.
Inflation protection. The team relies on the Asset Allocation Committee to help analyze how additions to a Retirement Fund's holdings might affect the overall portfolio. This support helps Clark make informed investment decisions aimed at helping individuals reach their financial goals. In 2010, for example, Clark included inflation-hedging strategies within the Retirement Funds. He added the T. Rowe Price Real Assets Fund to the equity side of the Retirement Funds' portfolios to provide exposure to natural resources and global infrastructure assets, which can smooth returns over a full inflationary cycle and protect long-term investors. On the fixed income side, he added an inflation-focused bond fund to help protect investors from inflation risk as they approach retirement. "We anticipate that long-term investors are going to experience these rising inflationary environments at some point," Clark says. "We've positioned the portfolio in ways that we expect will support the funds' performance in those environments."
MAXIMIZING GROWTH POTENTIAL
Most of the underlying funds in the T. Rowe Price Retirement Funds are actively managed by a team of professional managers and analysts who select securities based on careful, thorough analysis. Through this approach, 100% of the Retirement Funds beat their five-year Lipper average as of 12/31/12.* Past performance cannot guarantee future results.
Tactical adjustments. Investment professionals also apply their expertise to make tactical adjustments to the asset allocation of each fund—an essential action that experienced and inexperienced investors can find challenging. In many cases, short-term market volatility may cause investors to act inappropriately and switch their holdings at the wrong time. "They tend to sell low and buy high," Clark says. By contrast, Retirement Fund managers take a disciplined approach to investment opportunities: In 2008, for example, the funds' management team adjusted the asset allocation of many funds to optimize exposure to specific equities when stock prices were very low—a decision resulting from the firm's research and analysis of market conditions at the time.
A one-fund option. Clark and his team adjust the portfolios' asset allocations to meet retirees' income and growth needs. Holding just one T. Rowe Price Retirement Fund also means that investors don't have to consider selling funds or plan multiple required minimum distributions from their accounts. As a result, retirees can spend less time managing their investments and more time enjoying other things.
A RETIREMENT SAVINGS SOLUTION
Every investor needs a retirement savings strategy that offers the chance to build a sufficient asset base to achieve a desired standard of living in retirement and to provide a stable, long-term source of income that can maintain its purchasing power. With their combination of active management and an age-appropriate asset allocation strategy, T. Rowe Price Retirement Funds can provide these three fundamental benefits and serve as the foundation of an effective retirement portfolio.
1Source: Morningstar, Inc. Target-Date Series Research Paper, 2012 Industry Survey.
*Based on cumulative total return, 12 of 12, 12 of 12, 12 of 12, 5 of 5, and 7 of 7 of the Retirement Funds for individual investors outperformed their Lipper average for the 1-, 3-, 5-, and 10-year and since-inception periods ended 12/31/12, respectively. The Retirement 2010, 2020, 2030, 2040, and Income Funds began operations on 9/30/02; the 2005, 2015, 2025, and 2035 Fundsbegan operations on 2/29/04; the 2045 Fund began operations on 5/31/05; and the 2050 and 2055 Funds began operations on 12/31/06.
(Source for data: Lipper Inc.)
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