MUTUAL FUND SPOTLIGHT
Target Date Retirement Strategies From T. Rowe Price.
It’s a simple but unsettling reality: "Too many individuals are unprepared for retirement," says Jerome Clark, portfolio manager of the T. Rowe Price Retirement Funds and co-portfolio manager of the T. Rowe Price Target Retirement Funds. "So it’s critical that they understand the risks and choose investments that maximize their opportunity for financial success in retirement."
TWO APPROACHES TO ASSET ALLOCATION
A COMPLEX INVESTMENT LANDSCAPE
Individuals face multiple risks, including longer lifespans, inflation, and market risk, as they search for effective investment strategies to maintain a comfortable standard of living in retirement. "At the same time, people’s needs and desires come in different shapes and sizes," says Clark. "An effective solution must be flexible enough to account for individual preferences."
INNOVATIVE INVESTMENT STRATEGIES
T. Rowe Price has developed two suites of target date funds designed to meet retirement investors’ differing needs. Both asset allocation strategies automatically adjust their investment mix, reducing exposure to stocks and increasing exposure to bonds as the target date approaches—and continuing to adjust the mix of investments during retirement.
T. Rowe Price Retirement Funds seek asset growth and accumulation prior to retirement, while maintaining an asset base sufficient to generate lifetime withdrawals during a retirement lasting 30 years or more. To address inflation and longevity risks, this strategy uses a higher equity allocation than the industry average, typically around 55% at the expected retirement date. "This approach could be appropriate for investors willing to accept more volatility in their portfolio in exchange for the greater growth potential that stocks provide," says Clark.
While T. Rowe Price Target Retirement Funds also promote asset accumulation prior to retirement, they are designed to provide more principal certainty and support income withdrawals over a more moderate postretirement time horizon. The strategy maintains a lower equity exposure—42.5% at the expected retirement date—in favor of fixed income investments in order to reduce the risk of principal loss around and after the target retirement date. "This approach is designed for investors willing to accept more modest growth potential in exchange for less volatility around their retirement date," says Clark.
Both approaches offer important benefits. Expert allocation across a broad range of underlying stock and bond mutual funds aims to provide an age-appropriate balance of growth potential and stability. The underlying funds are managed by experienced portfolio managers, supported by T. Rowe Price’s independent global research platform. In addition, the Asset Allocation Committee—composed of some of the firm’s most senior investment professionals—periodically makes modest tactical adjustments to each suite’s asset allocation to reflect prevailing economic and market conditions. The investment mix of both funds is rebalanced regularly to help keep their long-term investment objectives on course with their respective designs.
AN EXPERIENCED PARTNER
"Our approach to target date investment strategies reflects the culture of T. Rowe Price—a commitment to research and collaboration among seasoned professionals in pursuit of investment management excellence for our clients," says Clark. Starting with the firm’s target risk products in the early 1990s, extending through the introduction of the Retirement Funds a decade later, and now to the recent expansion in the Target Retirement Funds, T. Rowe Price has ample experience managing asset allocation portfolios.
But the work doesn’t stop there. "As hard as we’ve worked to research, create, and manage our target date retirement strategies, the landscape is constantly shifting, and we have to be nimble enough to keep up," says Clark. "As new retirement challenges emerge for our clients, we will continue to look for solutions that meet their needs before, during, and after retirement."
The principal value of the Retirement Funds and Target Retirement Funds (collectively, the "target date funds") is not guaranteed at any time, including at or after the target date, which is the approximate year an investor plans to retire (assumed to be age 65) and likely stop making new investments in the fund. If an investor plans to retire significantly earlier or later than age 65, the funds may not be an appropriate investment even if the investor is retiring on or near the target date. The target date funds’ allocations among a broad range of underlying T. Rowe Price stock and bond funds will change over time. The Retirement 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 on supporting an income stream over a long-term retirement withdrawal horizon. The Target Retirement Funds emphasize asset accumulation prior to retirement, balance the need for reduced market risk and income as retirement approaches, and focus on supporting an income stream over a moderate postretirement withdrawal horizon. The target date funds are not designed for a lump-sum redemption at the target date and do not guarantee a particular level of income. The key difference between the Retirement Funds and the Target Retirement Funds is the overall allocation to equity; although they each maintain significant allocations to equities both prior to and after the target date, the Retirement Funds maintain a higher equity allocation, which can result in greater volatility over shorter time horizons.
Photograph by Mary F. Calvert