he decade leading up to your retirement is an especially important time because you'll have a number of questions to address," says Judith Ward, CFP®, a senior financial planner with T. Rowe Price. "By this stage, you're probably starting to envision what your lifestyle and spending will be after you leave your career. To help you with this process, you'll need to know how some basic choices—those you can make now and those you plan to make in the future—will influence your income in retirement."
Will I be able to spend what I need to live comfortably throughout retirement? This is the central question for many preretirees as they face a range of personal and financial choices in the years ahead. Being able to visualize how these choices may shape your future before you actually have to make them is a powerful—and, in fact, an essential—way to plan. "In the years before you retire, you should explore your options to see how one decision or a combination of decisions can change your retirement outlook," Ward says. "It's challenging to get a clear picture of the future—and that is exactly why we created FuturePath."
WHAT IS FUTUREPATH℠?
FuturePathSM was designed to help you explore how the decisions you'll need to make—such as when you retire, the timing of when you start taking your Social Security benefits, and how you allocate your investment assets—may affect your spending in retirement. The online resource helps you untangle the complex web of interconnected retirement decisions by helping you to see which choices make the biggest impact. "Retirement can be so abstract before you're in it," Ward says. "This resource lets you see into the future to answer questions such as, 'What if I retire one year later than planned or one year earlier?'"
Your Confidence Score. After you enter information about your current circumstances and financial plans, FuturePath℠ generates a Confidence Score—a single, personalized number on a scale up to 100 that suggests how confident you can be about your retirement planning goals. The score considers 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. This approach helps you see whether the amount you anticipate spending in retirement matches the amount of spending your current retirement plan is likely to be able to support. Your score will rise and fall as you make hypothetical changes to your retirement plan, and the FuturePathSM tool allows you to see the effects of each choice in isolation or all together as a unified strategy.
WHAT YOU CAN DO NOW
Achieving a comfortable retirement is based on a number of factors, only some of which you can control today. The two most important decisions that you can make now involve your savings rate and your asset allocation. Following is a look at how actions you take now can improve your financial position.
How much should I save?
FuturePath℠ will enable you to see the accumulated assets and income your current savings rate could produce. T. Rowe Price suggests a savings target of 15% of your salary, which includes any matching contributions from your employer's plan, if applicable. You also may want to take advantage of additional catch-up contributions if you're age 50 or older.
What should my asset allocation be?
As you near retirement, it's important to adjust your allocation to a balance of stocks and bonds, keeping in mind that your retirement could last for decades, which means growth remains an important component of your investment strategy. FuturePath℠ provides an allocation suggestion based on your age group—for example, age 50 to age 59—through its use of index-based hypothetical market scenarios to estimate portfolio returns. You also can compare your current allocation and T. Rowe Price's suggestion to determine which is more appropriate for you.
PLANNING FOR THE FUTURE
You'll have some choices to make in the future. When do you retire? When should you start taking your Social Security benefits? How could major spending in the future affect your income in retirement? It's important to incorporate these decisions into your overall plan now and understand the impact they will have on your retirement.