Choosing the right investments and staying properly allocated to stocks is a great challenge over the long term. Retirement funds offer professionally managed asset allocation and diversificationan ideal way for investors to save for retirement.
What kind of investments should you hold in your retirement accounts—and how should you manage a complex portfolio that may include multiple asset classes and sub-asset classes? Making these decisions can be difficult, in part because you need to account for the complex risks that could affect your nest egg, while saving for a goal that may be many years away and itself last for many decades.
Retirement-date funds, also known as target-date funds, draw on experienced investment professionals to manage all the moving parts of a retirement investment strategy in a single fund that is optimized for a specific time horizon. "Our funds are built to manage risk with a balanced approach that maintains an appropriate allocation to stocks and bonds both before and after you retire," says Jerome Clark, portfolio manager of the T. Rowe Price Retirement Funds. "Our team is dedicated to making nuanced decisions every step of the way so that investors can generate enough income from their savings throughout a long retirement."
ABOUT RETIREMENT FUNDS
A retirement-date fund is an age-based investment that adjusts its holdings and asset allocation as the time horizon shortens. Some of these funds adjust their portfolios only up to the year your retirement begins, but T. Rowe Price Retirement Funds take an extended approach that assumes your retirement could last to age 95—or even longer. You simply select the fund with the target date closest to the year you will turn age 65 (or turned 65, if you exceed that age), and the fund's asset allocation regularly shifts to reflect an age-appropriate investment mix to and through retirement.
Another key advantage of T. Rowe Price Retirement Funds is active management by our investment professionals, who select a diversified mix of other T. Rowe Price funds and adjust the portfolio as needed, based on market and economic conditions, always with an eye on the right investment mix for the time horizon. Of course, diversification cannot assure a profit or protect against loss in a declining market. The Retirement Funds have target retirement dates ranging from 2005 to 2055; depending on your risk tolerance and time horizon, you may wish to consider a Retirement Fund with a different target date.
PROTECTING AGAINST RETIREMENT RISKS
T. Rowe Price Retirement Funds are designed to mitigate three major risks to retirement savings.
Market risk. For many investors, the most obvious concern is market risk—the chance that your portfolio's value will decline due to market losses. One possible response is to adopt a conservative asset allocationfocusing on bonds or other fixed income investments, for example—in order to reduce the effects of market risk on your savings. However, conservative investment portfolios typically do not provide enough growth potential to support a retirement that may last 30 years or longer.
Inflation risk. Conservative asset allocations tend to produce results that fall short of retirement goals largely because of the second major retirement risk: the chance that inflation will reduce the purchasing power of your savings. At a 3% annual inflation rate, the purchasing power of a dollar erodes by roughly 50% every 24 years. As a result, an item that costs $100 today for an individual at age 65 will cost about $200 at 89. To offset that risk, T. Rowe Price Retirement Funds hold a higher-than-average equity stake up to and beyond their target date. "You need more than principal protection to offset inflation," Clark says. "If you have a long retirement, you need capital appreciation to help maintain the purchasing power of your savings."