Retirement Saving Guide

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  • 1. THE T. ROWE PRICERetirementSavings GuidePlan, save, and enjoyyour retirement.This guide is designed to help you thinkcarefully about your own retirementgoals and explore strategies and solutionsthat can help you achieve them.
  • 2. T. Rowe Price  Retirement Savings Guide.
  • 3. Plan, Save, and Enjoy Your Retirement.>> This guide is designed to help you think carefully about your own retirement goals and explore strategies and solutions that can help you achieve them. Whether you’re stillsaving for your retirement, preparing to leave your full-time career, or currently retired andmanaging your income, this guide offers you the collective expertise of experienced T. Rowe Pricefinancial planners and investment specialists.AdditionAl RetiRementPlAnning ResouRces What You’ll Find in this guide:Our Web site provides Saving for Retirement. n Guidelines on Saving for Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3extensive online guidanceon comprehensive retirement n Balancing College and Retirement Savings . . . . . . . . . . . . . . . . . . . . . . . . 7planning, including helpful n Strategic Tips for Young Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9calculators and tools. Youcan also contact a T. Rowe Approaching Retirement. n Strategies for Optimizing Retirement Income . . . . . . . . . . . . . . . . . . . . . 12Price retirement specialistat 1-800-638-5660 for more Living in Retirement.information on how to n Plan for a Successful Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18put our investment and n Determining a Realistic Withdrawal Amount and Asset Allocation . . . 19planning solutions to work n Strategies for Coping After Retiring Into a Bear Market . . . . . . . . . . . . 22for your retirement. Tools and Resources. n Your Financial Road Map to Successful Retirement . . . . . . . . . . . . . . . . 26 n Getting a Reality Check on Your Retirement Income Plan . . . . . . . . . . 28 troweprice.com/retirementplanning | 1-800-638-5660 1
  • 4. Saving for Retirement.
  • 5. guidelines on saving for Retirement>> Are you saving enough for retirement? This may be the most important financial challenge you face as the responsibility of funding retirement continues to shift fromemployers to individuals. And yet several recent studies have revealed that people are not savingenough for a financially secure retirement, especially as life expectancies continue to rise. Withpeople living longer and retiring without a guaranteed pension income, retirement planningis more important today than even a decade ago. Here are some guidelines on how much youneed to save.“One of the biggest risks for people delay saving until late in their careers, As indicated in the tables on page 4,planning for retirement is that they may however, may need to save as much as the burden on the investor can increasenot save enough to live comfortably in 25% or more of their salary, and even substantially by delaying saving. Fortheir retirement years,” says Christine then they may not accumulate enough example, those who are 20 years fromFahlund, CFP®, T. Rowe Price’s senior assets to reach their goal. Ms. Fahlund retirement and have saved only onefinancial planner. “If you don’t save notes that “most retirees will also receive times their current salary may be able toenough today, you may be faced with Social Security and possibly income replace only 29% of their preretirementthe harsh reality later in life of having to from part-time work, so that their total salary—even if they save 15% of theircut your expenses and standard of living amount of income in retirement may be pretax salary each year between nowdramatically. That’s why it’s so impor- closer to 70% of their salary than 50%, and retirement. On the other hand, iftant to start saving as early as possible including these other sources.” they had already saved three times theirand develop a disciplined approach.” The results of the T. Rowe Price study current salary, a 15% savings rate might are reflected in the tables on page 4. They enable them to replace almost half (47%)How Much Is Enough? show the percentage of salary that might of their income at retirement.Determining a reasonable savings rate be replaced in retirement depending on: Keep in mind, however, that thesefor your retirement will depend on (1) the number of years until retirement; projections do not take into account thevarious factors, including your expected (2) what percentage of pretax current possibility of receiving salary increaseslifestyle in retirement, health concerns, salary is being saved annually (assuming in excess of 3% on average due tohow much risk you are willing to take the current salary increases by 3% each promotions, job or career changes, orin your portfolio, the amount you have year); and (3) the amount already saved performance bonuses. Of course, thesaved so far, and how much time you for retirement, expressed as a multiple of more an individual’s income rises, thehave until retirement. current salary. more difficult it may be to replace the In an effort to help investors gain These projections are based on the targeted percentage of it in retirementperspective on their retirement savings assumption that the investor using this unless the individual increases his orneeds, T. Rowe Price has used a sophis- accumulation strategy will have a 70% her savings rate over time.ticated computer analysis (known as simulation success rate (the odds of suc-Monte Carlo simulation) to develop pro- cess) and that he or she maintains an Starting Earlyjections based on thousands of possible asset allocation of 60% stocks and 40% “There’s no doubt that starting retire-future market scenarios. bonds prior to retirement and then shifts ment planning early in life reduces the Using this methodology, we can to a more conservative approach—40% mental stress and pain later on,”compare the effects that a wide variety stocks and 60% bonds—after retirement. Ms. Fahlund says. “Most companiesof savings rates and investment strate- For example, an individual who is offer some sort of match in theirgies are likely to have on the amount 40 years from retirement (i.e., approxi- 401(k) plan, and, if you qualify, youof salary an investor may be able to mately 30 years old) and has no savings can include that as part of your 15%replace in retirement without running but expects to save 15% of pretax salary total contribution. For example, ifout of money. each year in combination with his or her you save 6% of your salary and the employer may be able to replace 61% company matches 50 cents on the dol-The 15% Solution of preretirement salary in retirement lar for that portion, you are alreadyThe analysis suggests that individuals from savings. If that person had already saving at 9% of salary. So employeesgenerally should strive to save at least saved one times his or her current salary, should at least take full advantage of15% of their pretax salary (including which means if someone earning $40,000 employer matches.”employer contributions) in order for has saved $40,000, then a 15% annual “The most important issue to focustheir investments to replace 50% or savings rate might enable him or her to on is what percentage of your annualmore of their current salary in retire- replace 79% of current salary, adjusted income you need to replace in yourment, adjusted for inflation. Those who for inflation. retirement,” she adds. “Usually, people troweprice.com/retirementplanning | 1-800-638-5660 3
  • 6. need at least 75% of their preretire-ment income in retirement even if theyhave taken care of most of their major How Much of Your Salary Can You Replace in Retirement?expenses such as college education fortheir kids, saving for retirement, and 20 Years to Retirementpaying off their mortgage. Of course, Current Savings as Multiple of Current Pretax Salarysome of this may come from other Annual Savings 0x 1x 3x 5xsources such as Social Security, a pen- (% of Currentsion, and part-time employment. Pretax Salary) Retirement Income as % of Salary “Ultimately, at least part of each 5% 7% 16% 34% 51%investor’s future financial success will 10 14 23 40 58depend on how much he or she has 15 20 29 47 65already saved. Obviously, if someone 20 27 36 54 72has not saved for retirement, that situ- 25 34 43 61 79ation cannot be changed retroactively.However, he or she may still be ableto generate some savings before retire- 30 Years to Retirementment by not spending any employment Current Savings as Multiple of Current Pretax Salarybonuses or any inheritance, or by down- Annual Savings 0x 1x 3x 5xsizing or changing a residence upon (% of Currentretirement and investing the difference.” Pretax Salary) Whatever savings plan for retirement Retirement Income as % of Salaryyou pursue, you should review your 5% 12% 25% 50% 75%results periodically to see if you are on 10 25 37 63 88track. In addition, you may want to 15 37 50 75 100consult the retirement planning informa- 20 49 62 88 113tion and calculators on our Web site, 25 62 75 100 125troweprice.com/retirementplanning.A Better Alternative to the 40 Years to Retirement“Average” Rate of Return Current Savings as Multiple of Current Pretax SalaryMany retirement planning analyses still Annual Savings 0x 1x 3x 5xbase their investment projections on (% of Current Pretax Salary)fixed average annual rates of return. Retirement Income as % of SalaryIn effect, these analyses assume that 5% 20% 38% 74% 109%the identical investment return will be 10 40 59 94 130achieved each and every year. 15 61 79 115 151 In fact, the results of projections using 20 81 99 135 171the “average” rate of return method are 25 101 120 156 192usually not the same as the results ofprojections of multiple simulations of The projections or other information generated regarding the likelihood of various investmentthe market’s potential ups and downs. outcomes are hypothetical in nature, do not reflect actual investment results, and are notGenerally, average rate of return calcu- guarantees of future results.lations paint a picture that may be too The tables show what percentage of preretirement income you may be able to replace fromoptimistic and not realistic enough. For savings, based on years to retirement, current savings expressed as a multiple of currentexample, they may result in a recom- salary, and what percentage of pretax salary is being saved on a tax-deferred basis each year between now and retirement. So if you are 30 years from retirement and have saved threemendation to save less for retirement times your current salary and are saving 15% of your salary each year, you may be able tothan will actually be required based on replace 75% of your preretirement salary in retirement.the unpredictable nature of the markets. The analysis assumes annual salary increases of 3% and that the amount of income in retire- Monte Carlo simulation is an analyti- ment increases by 3% each year to keep pace with inflation. It also assumes that your portfoliocal tool for modeling future uncertainty. consists of 60% stocks and 40% bonds prior to retirement and 40% stocks and 60% bonds afterIn contrast to deterministic tools (e.g., retirement. The analysis is based on 100,000 potential (not historical) market scenarios with a 70% chance of maintaining this income stream throughout a 30-year retirement period. Theexpected-value calculations) that model analysis assumes annualized expected returns of 10.0% for stocks, 6.5% for bonds, and 4.75%the average-case outcome, Monte Carlo for short-term bonds and annual expenses of 1.211% for stocks, 0.726% for bonds, and 0.648%simulation generates ranges of outcomes for short-term bonds.based on our underlying probability Source: T. Rowe Price Associates, Inc.model. Thus, outcomes generated via4 troweprice.com/retirementplanning | 1-800-638-5660
  • 7. Monte Carlo simulation incorporate • These monthly returns are then used to • Market crises that can cause assetfuture uncertainty and give you a likeli- generate thousands of simulated market classes to perform similarly overhood of a certain goal being achieved, scenarios. These scenarios represent a time, reducing the accuracy of thewhile deterministic methods do not. spectrum of possible performance for projected portfolio volatility and the asset classes being modeled. The returns. The model is based on theAddressing Uncertainty success rates are calculated based on long-term behavior of the assetThe analysis results in a range of pos- these scenarios. classes and therefore is less reliablesible future outcomes of a retirement • We do not take any taxes or required for short-term periods.planning investment strategy under minimum distributions (RMDs) into • A model assumption that there is nothousands of different market scenarios, consideration, and we assume no early correlation between asset class returnsallowing us to determine the likelihood withdrawal penalties. from month to month. This meansthat each strategy will still have assets that the model does not reflect theremaining at the end of retirement. This • nvestment expenses in the form of an I expense ratio are subtracted from the average periods of “bull” and “bear”probability measure is called a strategy’s markets, which can be longer thansimulation success rate and reflects the expected annual return of each asset class. These expenses are intended to those modeled.number of times in the simulations aparticular strategy “succeeds” (i.e., has represent the average expenses for a • Inflation that is assumed to be con-at least $1 remaining in the portfolio at typical actively managed fund within the stant; variations in inflation levels arethe end of the retirement period). peer group for each asset class modeled. not reflected in our calculations. The chart below is a hypothetical exam- • An analysis that does not take into Material Limitationsple illustrating 11 simulations. consideration all asset classes; other Material limitations of the investment asset classes not considered may have We started with a current balance model include: characteristics similar or superior toand tracked changes to the balanceover a specific time period. Each line • Extreme market movements that may those being analyzed.in the graph represents this strategy occur more frequently than repre- IMPORTANT: The projections oras it responded in our simulations to sented in our model. other information generated by theone hypothetical sequence of monthly • Some asset classes that have relatively T. Rowe Price Investment Analysisinvestment returns. limited histories. While future results Tool regarding the likelihood of various The orange line represents the hypo- for all asset classes in the model may investment outcomes are hypotheticalthetical sequence of monthly investment materially differ from those assumed in nature, do not reflect actual invest-returns that resulted after 30 years in the in our calculations, the future results ment results, and are not guaranteesmedian ending balance, where 50% of the for asset classes with limited histories of future results. The simulations areoutcomes are above the median ending may diverge to a greater extent than based on a number of assumptions.balance and 50% are below it. the future results of asset classes with There can be no assurance that the longer track records.Material AssumptionsThe investment results shown in the Account Valuevarious charts in this booklet were devel-oped with Monte Carlo modeling using $5,000,000the following material assumptions: 4,000,000• The underlying long-term expected annual return assumptions for the asset 3,000,000 classes indicated in the charts Above are not historical returns, but are 2,000,000 based on our best estimates for future long-term periods. Our annual return 1,000,000 50% assumptions take into consideration Below the impact of reinvested dividends and 0 capital gains. 0 5 10 15 20 25 30• We use these expected returns, along Years in Retirement with assumptions regarding the vola- • Median ending balance after 30 years in retirement is illustrated at tility for each asset class, as well as the end of the orange line, reflecting one of the 11 simulations of the intra-asset class correlations, to potential market scenarios: 50% of the outcomes result in ending balances above the median balance and 50% below. generate a set of simulated, random monthly returns for each asset class This is a hypothetical illustration. There are 11 simulations in this example. over the specified period. The projections or other information generated regarding various investment strategies are hypo- thetical in nature, do not reflect actual investment results, and are not guarantees of future results. troweprice.com/retirementplanning | 1-800-638-5660 5
  • 8. projected or simulated results will be simulating 100,000 possible market simulation scenarios used (in this caseachieved or sustained. scenarios and various asset allocation 100,000) to obtain the simulation success The charts present only a range of strategies. The underlying long-term rate. These results are not predictions,possible outcomes. Actual results will expected annual return assumptions but they should be viewed as reason-vary with each use and over time, and (gross of fees) are 10% for stocks; 6.5% able estimates.such results may be better or worse for intermediate-term, investment-grade Source: T. Rowe Price Associates, Inc.than the simulated scenarios. Clients bonds; and 4.75% for short-term bonds.should be aware that the potential The following expense ratios are thenfor loss (or gain) may be greater than applied to arrive at net-of-fee expecteddemonstrated in the simulations. returns: 1.211% for stocks; 0.726% for The initial contribution or withdrawal intermediate-term, investment-gradeamount is the percentage of the initial bonds; and 0.648% for short-term bonds.value of your salary or investments For each combination of initialcontributed or withdrawn in the contribution or withdrawal amountfirst year where the entire amount is and investment strategy, we count thecontributed or withdrawn on the first number of simulation scenarios that areday of the year; in each subsequent “successful” (i.e., in which there is atyear, the amount is adjusted to reflect least $1 remaining in your account ata 3% annual rate of inflation. The the end of your retirement). We dividesimulation success rates are based on this number by the total number of6 troweprice.com/retirementplanning | 1-800-638-5660
  • 9. Balancing college and Retirement savings>> If you’re a parent, you may find yourself asking which financial goal should take priority—funding your child’s college education or saving for your retirement. Whilefinancial planners generally suggest that retirement take precedence, many parents are firmlycommitted to providing their children with enough money for college. Here is some expertguidance on how to successfully balance college and retirement savings.While financial priorities are a matter ofpersonal choice, parents need to keep Juggling Competing Goals: Saving for Retirement andthings in perspective, cautions T. Rowe Your Children’s College EducationPrice Senior Financial Planner Christine 36-Year Investment Period (including 18 years precollege)Fahlund, CFP®. She points out that if Final Balanceyou don’t have sufficient assets or a pen- (thousands) $3,000sion, there are limited options other than Option A Option B Option C Option DSocial Security and continued employ- 2,500 $2,541ment for funding your retirement. $2,042 On the other hand, there are various 2,000 $1,694 $1,650funding sources for college, ranging $1,361from loans and scholarships to sum- 1,500 $1,100mer jobs and, in many cases, gifts from 1,000grandparents. $759 $506 “Another important consideration is 500 $253whether you want to be financially self- $80 $126sufficient in retirement or whether you 0 All savings for Savings for Split savings until Savings for collegewant your children—who may be try- retirement retirement only college begins, only for first 18ing to raise their own families—to help for 18 years, then then save for years, then for used for 10-year retirement only retirement onlysupport you as well,” Ms. Fahlund says. college loan, then over final 18 years over final 18 years“The best strategy for your family over- for retirement again over finalall is for you to stay financially healthy, eight yearsso your first priority probably should be Available at Available at Available atinvesting for your own future—unless college age retirement age retirement ageyou live very modestly and know that after tax pretax (with 50% pretax (with no 401(k) match) 401(k) match)you can rely on a substantial pension tocover your needs in retirement. The chart compares the impact of different savings strategies on the amount of money “Nevertheless, we recognize that potentially available for retirement and college. All scenarios assume that a couple with a combined income of $100,000 invests 6% of their income each year over the next 36 years (18saving only for retirement is not very years prior to their child starting college and 18 years from the start of college until the coupleappealing to most parents. They want to retires). The examples also assume the couple’s income grows 3% annually; investments earnsave for college as well.” an average annual 8% pretax rate of return; and retirement savings are invested in a 401(k) plan and college savings in a 529 plan. Any earnings grow tax-deferred in both types of plans 3000Comparing Strategies but can be withdrawn federal tax-free from the 529 plan (if used for qualified educational AvailabT. Rowe Price analyzed various sav- expenses), while the entire savings in the 401(k) is subject to taxation upon withdrawal. The 2500 Availab assumed 401(k) match is 50%. In the scenario where the investor takes out a loan for collegeings strategies to compare the possible (Option B), the amount borrowed is based on a 5% bank loan that could be paid back over a 2000 Availabimplications of different approaches 10-year period, with the amount allocated to college savings.to investing for retirement and college 1500simultaneously. The results, shown in the chart at 1000right, are for comparative purposes only move up 300 pts 500and do not indicate how much someonemay actually need to save to meet his or 0 Savings for retirement onlySavingsyears, then used for until college begins, then saveretirement again over final 8 years All for 18 for Retirement Split savings 10-year Savings loan, then for for retirement only overfor retirement only over final 18 y college for college only for first 18 years, then final 18 yearsher individual college and retirementsavings goals. troweprice.com/retirementplanning | 1-800-638-5660 7
  • 10. The examples make these assumptions: be subject to taxation upon withdrawal This strategy produces the lowestthe parents have a combined income of in retirement.) amount available for college, although$100,000, which increases 3% annually; If the couple decided to focus on the amount available at retirement isthey invest 6% of their salary each year college first, investing the same amount only 20% less than if the investor hadover a 36-year period (18 years prior to each year in a 529 plan for the first 18 saved exclusively for retirement for thethe child starting college and 18 years years, they could accumulate $253,000 full 36 years. Even though the couplefrom the start of college until the parents by the time the child starts school temporarily ceased funding retirementretire); savings earn an average annual (Option D in the chart). In this case, for a decade, they were still able to8% pretax return; and retirement savings they would defer saving for retire- benefit significantly from the long-termare invested in a 401(k) plan and college ment until the child starts college. This compounding of the investments madesavings in a 529 plan where earnings are strategy provides the most for college during the first 18 years.also tax-deferred and, unlike the 401(k), but potentially reduces their retire-could be withdrawn tax-free. ment savings by 70% compared with A Balancing Act There is, of course, no single strategy[ ] the all-retirement strategy. “Unless an investor has numerous other ways that will work best for every family. “As “. . . don’t fall into the trap to pay for retirement, this strategy you evaluate your investing options, it’s of becoming so obsessed should probably not be considered,” important to keep in mind the effects of with . . . paying for college Ms. Fahlund suggests. the trade-offs you make,” Ms. Fahlund What if this family decided on a dual advises. “It’s all a balancing act. While that you neglect your it’s admirable to want what’s best for approach, splitting their annual invest- own retirement.” ment between college and retirement your children, don’t fall into the trap of until college started, and then investing becoming so obsessed with the goal of If the couple invests only for their only for retirement after that (Option C)? paying for college that you neglect yourown retirement over the full 36-year They would accumulate more than twice own retirement.”period (Option A in the chart on as much for retirement compared with Earnings on a 529 plan distributionpage 7), their retirement nest egg would the putting-college-first plan, although not used for qualified expenses may bebe worth nearly $1.7 million, assuming the amounts dedicated to college would subject to income taxes and a 10% federaltheir 401(k) plans offered no matching be worth about 50% less. penalty. Please note that the availability ofcontributions. If their plans provided The final scenario (Option B) involves tax or other benefits may be conditioneda 50% match, the amount accumulated saving only for retirement until college on meeting certain requirements, such aswould be more than $2.5 million. begins, then using the full annual savings residency, purpose for or timing of distri- “Given the potential boost provided amount for the next 10 years to repay a butions, or other factors, as applicable.by a company match, investors should college loan at 5% interest. After that,certainly factor this in when choosing the couple reverts to saving exclusivelya savings strategy,” Ms. Fahlund says. for retirement over the final eight years.(Note: All money in the 401(k) would8 troweprice.com/retirementplanning | 1-800-638-5660
  • 11. strategic tips for Young investors>> If you’re a young investor, long-term financial goals like saving for retirement may seem very distant. But even if you’re at the onset of your career, it’s important tobegin saving for your financial goals as soon as possible. Here are some strategic tips fromT. Rowe Price financial planners to help you get started.Pay yourself first: Those who say they’ll A T. Rowe Price analysis suggests that With a nondeductible Traditionalsave or invest after taking care of other saving at least 15% of your salary each IRA, only the earnings in the accountexpenses often find that there’s noth- year for retirement as soon as you start are taxed when withdrawn. With aing left over. To make it easier to pay working, and then maintaining at least deductible Traditional IRA, youryourself first, enroll in your company’s that percentage throughout your career, contributions are tax-deductible in the401(k) plan or sign up for an “automatic can put you on a path toward a finan- year you make them, but then taxesasset builder” program in which money cially secure retirement. must be paid on the assets at with-from your paycheck or bank account— Consider IRA investments: For single drawal. If you don’t need tax benefitsoften as little as $50 per month—can be tax filers with earned income of less than now, the potential for future tax-freeautomatically invested for you. $120,000 for 2010, investing in a Roth withdrawals may make the Roth IRA IRA can help you start building a retire- the better choice.Start early: Due to the effects of com-pounding, starting early can have signifi- ment nest egg. The Roth IRA tends to Invest in equities for long-term growthcant long-term benefits. As seen in the be a better choice for younger investors potential: For your retirement portfolio,chart below, for example, someone who than Traditional IRAs (whether deduct- invest up to 90% in equities, assumingsaves $100 per month for 10 years in ible or nondeductible) because of how you can tolerate market downturns.a tax-deferred account and then stops the tax benefit works. Historically, investments in stockscontributing would accumulate more by With a Roth IRA, you receive no have provided more long-term growthage 65 than someone who waits 10 years tax deduction on your contributions, opportunities than bonds and short-termbefore starting, and then invests $100 but you pay no taxes (assuming certain investments. Since younger investorsper month for the subsequent 33 years. conditions are met) on the much larger have a longer period of time to overcomeOf course, someone who saved $100 amount you are likely to have accumu- market setbacks, it is usually prudent forper month for the entire 43 years would lated when you begin withdrawing from them to invest a significant portion ofdo best, ending up with more than your Roth IRA decades from now. Since their portfolio in stocks. This percentage$450,000. you could be in a higher tax bracket at can be decreased as you get older. retirement than you are early in yourLook for free money: When evaluating career, the tax-free withdrawals becomejob opportunities, check out the avail- that much more valuable.ability of a 401(k) plan, when you wouldbe eligible to participate, and whetherthe company will match some of your The Advantage of Starting Earlycontributions. The “free money” from a Saving $100 per Month Account Valuecompany match can make a significant Years of Saving at Age 65contribution to your retirement nest egg.Balance long- and short-term goals: 43 years $450,478Although thinking about a retirementthat’s 30 to 40 years away can be dif- 10 years no contributions $255,824ficult when other needs seem morepressing, it’s important to make saving no contributions 33 years $194,654for retirement an equal—if not moreimportant—priority. Strive to save at Age: 22 32 65least 10% to 15% of your income for Starting early is key to accumulating retirement savings. A 22 year old who invests $100 perretirement, with any additional savings month for 10 years and then stops investing could accumulate more than someone whoearmarked for short-term goals such as a delays saving for 10 years and then contributes until age 65, even though the investor whocar, vacation, or house. delayed contributed more than three times as much ($39,600) as the investor who started early Saving for both long- and short-term and then stopped ($12,000). Of course, the investor who contributes for the full 43 years ends up with a significantly higher account value at retirement.goals means you’ll have money formajor expenditures, while also helping These amounts assume $100 invested each month in a tax-deferred account and an 8% annual rate of return.to ensure your financial future. troweprice.com/retirementplanning | 1-800-638-5660 9
  • 12. Budget for unexpected expenses: To Get the insurance you need: One way to Pay off your credit cards: The ideal waymake sure you don’t spend more than protect yourself against very large unex- to use credit cards is to pay them off, inyou earn, in addition to budgeting for pected expenses is to purchase insurance. full, every month. Credit cards are usu-fixed expenses (housing, utilities) and While most people wouldn’t think of ally the most expensive source of bor-flexible expenses (restaurants, recre- going without car insurance, other types rowed money. The interest you pay onation), you also need to plan for unex- of insurance also provide a safety net your credit card purchases can add sig-pected expenses such as car repairs or and don’t necessarily cost a lot. Renter’s nificantly to the cost of an item—moneyhealth care costs. Often, those in finan- insurance provides liability coverage as that could be directed toward yourcial trouble find that although they were well as protection for your possessions. retirement or other savings goals instead.not living beyond their means, they were Health insurance is also important, even Paying your credit card and other billsunprepared for unexpected expenses. if it’s only a catastrophic policy to tide on time can eliminate penalty fees andSuddenly they are overspending and you over until you are eligible for an also enhance your credit profile.must start borrowing. employer’s group plan.10 troweprice.com/retirementplanning | 1-800-638-5660
  • 13. Approaching Retirement.
  • 14. strategies for optimizing Retirement income>> With more than 70 million baby boomers likely to enter retirement over the next 20 years, the hard truth is that only a small minority are accumulating enoughsavings to provide for their income needs during decades in retirement.This uncomfortable reality is particularly Working Longer salary to 25%, for example—is cer-true given the overall rise in life expec- Generally, Ms. Fahlund says that “no tainly positive but relatively marginaltancy, sharply rising medical costs, the single decision will improve preretirees’ in terms of increasing annual retire-trend toward more active and costly retire- potential retirement security as much as ment income from investments in justment lifestyles, and, not least, the relentless continuing to work even a few more years a few years.toll of inflation. beyond the anticipated retirement date.” • ikewise, those who invest more L For the financially fortunate with suf- Appealing or not, this is usually the best aggressively as they approachficient personal savings, Social Security option for those who come up short on retirement—moving, say, from 60%benefits, and corporate pensions to meet retirement savings. of their portfolio assets in equities toall their retirement income needs, the main Unless preretirees enjoy a windfall or 70% or more—also are not likely tofinancial challenges of retirement are how a sharp rise in their incomes late in their make up for lost time. And becauseto invest and spend wisely and perhaps careers, those just a few years from retiring of potentially greater investmentprovide for their heirs as well. who have not saved enough will probably volatility, this step could actually However, more than 75% of workers not be able to make up their shortfalls cause their portfolio balances to dropage 55 and older report having less than solely with increased savings levels or by significantly just before or after their$250,000 in investments apart from their investing more aggressively. They simply desired retirement date.homes and pensions, according to a March will not have enough time for their assets2010 survey by the Employee Benefit • n the other hand, continuing to work O to compound.Research Institute (EBRI). At a recom- full time could increase preretirees’ T. Rowe Price studies show:mended initial withdrawal amount of 4%, expected annual retirement income • he long-term impact of a greater T from their investments, in today’s dol-that provides an income from their invest- rate of savings at this late stage—even lars, by about 7% for each additionalments of just $10,000 in the first year of boosting saving from 15% of one’s year of work and contributions.retirement. Nevertheless, those approaching retire-ment can improve their income and finan- Exhibit 1. The Impact on Retirement Income of Working and Saving Longercial security in retirement depending on Cumulative Percentage Gain in Retirement Income From Investments at Different Savings Ratestheir flexibility and their approach to (Current Dollars)four big decisions that are usually under 100% 2their control: — 25% Savings Rate Retirement Income 80 1 • hen they stop working. W — 15% Savings Rate % Increase in 0 60 — 0% Savings Rate • hen they start taking Social Security. W 40 • ow they manage withdrawals from H their savings. 20 • ow they allocate their assets. H 0 62 63 64 65 66 67 68 69 70 The first two can have a significant impact Age Start Taking Withdrawalson the amount of income in retirement, This chart shows the cumulative percentage increase in retirement income from anwhile the second two affect the sustainability investment portfolio for each year the individual continues to work beyond age 62,of that income over a 30-year retirement. depending on whether 25%, 15%, or 0% of wages is invested each year. All figures are in “Taken together, controlling these current dollars. The study assumes an annual salary of $100,000; $500,000 in tax-deferred savings at age 62; an annual inflation rate of 3%; an asset allocation of 40% stocks, 40%decisions will go a long way toward bonds, and 20% short-term bonds and cash; and a 90% probability that income will bedetermining retirees’ overall security in sustained until at least age 95. Portfolio performance is based on a probability analysisretirement,” says Christine Fahlund, CFP®, described in the “Guidelines on Saving for Retirement” article on page 3.a senior financial planner at T. Rowe Price. So, for example, if this individual worked until 65, his or her annual retirement income from“Careful planning helps preretirees do a investments would be 28% greater than if he or she had retired at 62, assuming he or she saved 25% of his of her salary each year. Even if none of the annual earnings were saved, thebetter job of optimizing their resources so individual’s income would be 12% greater at 65 because he or she did not have to tap into histhat they can live with fewer worries and or her retirement savings while continuing to work.greater opportunities.”12 troweprice.com/retirementplanning | 1-800-638-5660
  • 15. Working an additional three years—say 4% per year, or about 12% after three $15,000 annually from Social Security but from ages 62 to 65—and continuing to years, because the retiree would not have you continue working with annual wages save 15% of salary could raise annual to tap into existing savings. of $30,000, your annual benefit would be income from investments by 22%, or While many retirees may not want or reduced by $7,920. This leaves only $7,080, by 39% after working an additional be able to continue working in their same pretax, to spend instead of $15,000. If your five years. (See chart on page 12 for jobs full time, they could still improve their total wages were approximately $44,200 or underlying assumptions.) potential income in retirement by working more, this strategy for taking Social Security part time in the same or another job. will not apply since the $1 for $2 reduction • nd if this individual worked an A Although wages are likely to be would exceed the expected benefit and you extra five years and boosted his or her reduced with part-time work, the same would not have any benefits to spend. savings to 25% of annual earnings, his potential financial dynamics apply: Once you reach full retirement age, or her annual retirement income from Every dollar earned is one that doesn’t however, you can work and earn as much savings would be 50% higher than if have to be withdrawn from retirement as you like without any reductions in he or she had retired at age 62. savings. Indeed, $20,000 in annual income Social Security benefits. Moreover, your The logic behind this is simple: Those from a part-time job is the equivalent of Social Security benefit at full retirementwho continue working can contribute to withdrawing 4% a year from an additional age would be recalculated to reflect anytheir savings for a few more years, delay $500,000 in savings. months you did not receive a benefit checktapping into their nest eggs, and reduce the “As you near retirement, you may want due to excess earned income.number of years that their assets will have to consider phasing it in rather than sim- Therefore, if you are still working whento generate income in retirement—a ply stopping work altogether, or possibly you reach full retirement age and wouldpowerful combination. switching to another, more enjoyable, type like to start taking your Social Security Moreover, as discussed next, this strat- of work,” Ms. Fahlund suggests. “This benefits then invest or spend them, you canegy may enable them to delay when they approach may allow you to spend more do so without any reduction in benefits nostart taking Social Security benefits, which time on new pursuits while growing the matter how much you earn.can significantly increase those payments. assets you will need to draw on later.” Also, those who continue working may Taxing Social Securityreceive health and life insurance and pre- Taking Social Security With Taxes can also affect your Social Securityscription drug benefits from their employ- Earned Income benefits. If you continue to have substantialers—all expenses that more and more If you are at least 62, you can receive Social earned income or income from otherretirees have to cover themselves. (Retirees Security benefits and continue to work full sources such as investments in retirement,are not eligible for Medicare until age 65.) or part time, but there is a trade-off. Until you may have to pay income tax on a “Delaying retirement does not neces- you reach full retirement age (see pages 14 portion of your Social Security benefits.sarily mean delaying gratification,” Ms. and 15), your Social Security benefits are For instance, married couples filing aFahlund says. One novel strategy that can reduced by $1 for every $2 earned above joint return with between $32,000 andboth boost retirement income and make a certain amount each year. (This amount $44,000 in “provisional income” may haveworking longer more palatable involves is $14,160 in 2010.) In the year of your to pay income tax on up to 50% of theirspending more, while still working, on full retirement age, benefits are reduced Social Security benefits, even if they earnhobbies, travel, education, or other retire- by $1 for every $3 earned over $37,680 in no wages during this period. Couples withment dreams rather than investing the 2010 until you actually reach the month more than $44,000 in provisional incomeadditional earnings from work. of full retirement age. Therefore, if you may have to pay tax on up to 85% of This strategy could still increase turn 62 this year and expect to receive their benefits.retirement income from investments by Exhibit 2. The Impact of Delaying Social Security Benefits Social Security payments calculated using the Quick Calculator on Annual Annual Age Social Security % Increase Social Security % Increase the ssa.gov Web site. This assumes an individual who is age 62 in Benefits Payment in Over Benefit Payment in Over Benefit 2010 (with a full retirement age of 66) who is continuing to work Begin Current Dollars at Age 62 Inflated Dollars at Age 62 and earning $100,000 each year until benefits begin. Actual benefits could be higher or lower than those obtained from the calculator. 62 $17,760 – $17,760 – 63 19,164 8% 20,268 14% Each year this individual continues working, his or her annual retire- 64 20,940 18 22,728 28 ment income in today’s dollars from Social Security would increase by about 8% and annual retirement income in inflated dollars from 65 22,752 28 25,404 43 Social Security would increase by about 14% per year, regardless of 66 24,612 39 28,308 59 how much of his or her additional wages he or she saves annually. 67 26,808 51 31,752 79 Delaying taking Social Security benefits from age 62 until age 70 68 29,028 63 35,436 100 would result in an increase of more than $15,600 in today’s dollars 69 31,272 76 39,372 122 per year and almost $25,600 in inflated dollars per year. 70 33,384 88 43,356 144 Sources: T. Rowe Price Associates and Social Security Administration. troweprice.com/retirementplanning | 1-800-638-5660 13
  • 16. Total Social Security Benefits Received *Benefits in this hypothetical example are not adjusted for inflation. Exhibit 3: Total Social Security Benefits Received, In Pretax Current Dollars, Depending on Age They Begin (Assuming $17,760 Annual Benefit at age 62; $24,612 at Full Retirement Age of 66; and $33,384 at Age 70) For single filers, up to half the benefit "7is taxable with provisional income of Exhibit 3. Total Social Security Benefits Received, in Pretax Current Dollars, Depending on Age They Begin "8$25,000 to $34,000 and up to 85% is tax-able for income over $34,000. (Provisional (Assuming $17,760 Annual Benefit at Age 62; $24,612 at Full Retirement Age of 66; and $33,384 "9 at Age 70)income is your adjusted gross income,including wages, plus any tax-exempt $159,840 Take Benefits at Age 62 70 $123,060interest income from your investments, $33,384 Take Benefits at Age 66 Take Benefits at Age 70 Retiree’s Ageplus half of your Social Security benefit.) $337,440 80 $369,180Delaying Social Security $367,224Delaying taking Social Security ben- $515,040 90 $615,300efits can significantly increase a retiree’s $701,064income. For example, those benefits 0 $200,000 $400,000 $600,000 $800,000(in today’s dollars) increase approximately Total Social Security Benefits Received8% per year based on Social SecurityAdministration formulas. T. Rowe Price financial planners cite remainder of your life, except in certain Thus, delaying three years (from 62 results of recent actuarial studies that urge circumstances,” she says.to 65) results in a 28% increase in the married investors who are 65, for exam-purchasing power of a retiree’s Social ple, to plan for at least one spouse living Three Steps CombinedSecurity benefits, and delaying until age in retirement to 95. Taking all three steps to increase potential70 almost doubles the purchasing power If our hypothetical Social Security recip- retirement income—continuing to workof these benefits (about 88%). (See chart ient lives to 90 or longer, he or she would and save at a 15% rate and delaying Socialon page 13.) The potential gain in actual ultimately receive more total benefits if Security—could increase the purchasingbenefits could be even higher (about he or she began taking them at 70 than if power of total retirement income from144%) because Social Security benefits are he or she started at 66 or 62, even though retirees’ combined investments and Socialadjusted annually for inflation. benefits were paid over a shorter period. Security benefits by about 8% for each Exhibit 3 shows total Social Security “Extreme care must be taken when year after 62, or 25% in three years (asbenefits in current pretax dollars, depend- deciding at what age to begin taking your reflected in Exhibit 4, which also providesing on when benefits begin and how long Social Security payments,” Ms. Fahlund the underlying assumptions).they are paid, assuming a $24,612 annual cautions. “The annual amount, at what- And doing that from ages 62 to 70benefit at full retirement age of 66 com- ever age you pick to begin taking Social would almost double total retirementpared with a $17,760 benefit at 62, or a Security, will be locked in [adjusted for income from investments and Social$33,384 benefit at 70. Analyzing whether inflation or possible other credits] for the Security in today’s dollars.you should take benefits at a reduced ratebefore reaching full retirement age, or Exhibit 4. The Combined Impact of Working Longer and Delaying Social Securitywhether you might be better off in the Cumulative Increase in Retirement Income From Investments and Social Security for Each Year After Age 62long run by waiting for your scheduledbenefit at full retirement age or later, 100%really depends on whether you can afford 80 � 0% Savings Rate Retirement Income � 15% Savings Rateto delay receiving benefits and how long % Increase in 60 � 25% Savings Rateyou expect to live. For example, a personwho receives a pretax benefit of $17,760 40starting at age 62 will have received the 20same total benefits by 77 (16 years) as if 0he or she had started receiving a $24,612 63 64 65 66 67 68 69 70 Age Start Taking Withdrawals and Social Securitybenefit at 66. From 78 on, the cumula- This chart shows the cumulative percentage increase in total retirement income fromtive benefit is greater if this individual both working and saving longer and delaying Social Security for each year beyond age 62,had waited to begin benefits until full depending on whether 25%, 15%, or 0% of wages is invested each year. The assumptions areretirement age (assumed to be 66 in this the same as for the charts on pages 13 and 14 that show gains from just working longer or from delaying Social Security benefits.example). So, for example, if this preretiree worked until age 65, his or her annual combined Likewise, if this individual delayed retirement income from investments and from Social Security would be 30% greater than ifbenefits until age 70, thus qualifying for a he or she had retired at 62, assuming he or she saved 25% of his or her salary each year. Evenbenefit of $33,384, his or her cumulative if none of the annual earnings were saved, the preretiree’s income would be 21% greater at 65 because he or she did not have to tap into his or her retirement savings while continuingbenefits would be greater from age to work, and he or she delayed taking Social Security benefits, which increase in value for81 on compared with starting benefits at each year they are postponed until age 70. If this individual worked until 67 and saved 25%62. Although 81 may seem a long way off, of salary, his or her combined retirement income would be 52% greater than at 62.14 troweprice.com/retirementplanning | 1-800-638-5660
  • 17. To boil this down, here is another way It’s often easy to underestimate longev- T. Rowe Price simulation studiesof looking at the overall benefit of working ity, particularly because married couples show that:longer and delaying Social Security ben- may neglect to take into account their joint • or a 30-year retirement, an initial Fefits. If a 62 year old wants about a 30% life expectancy when it comes to Social withdrawal amount of 4% from aincrease in the purchasing power of his or Security. balanced portfolio of assets (with 3%her retirement income from investments “Many financial planners used to recom- annual increases in the withdrawaland Social Security, then he or she could: mend taking your Social Security benefits amount for inflation) would provide as as soon as you become eligible,” Ms. high as an 89% chance of having assets • etire in three years at 65 by saving R Fahlund says. “But today, with greater lon- remaining at the end of this period. A 25% of his or her salary annually. gevity, delaying Social Security for as long 5% initial withdrawal amount with • etire in three and a half years at 65½ R as possible may be the best strategy if you by saving 15% of his or her salary inflation adjustments, on the other can afford it.” hand, reduces these odds to a range of annually. 40% to 65%, depending on the asset • etire in four years at 66 by spend- R Taking Withdrawals allocation strategy. ing rather than saving his or her The third and fourth major decisions faced additional earnings. by preretirees—their withdrawal amounts • f retirees suffer poor portfolio returns I and their portfolio’s asset allocation in in the first few years of retirement,(These illustrations assume that the retiree retirement—boil down to figuring out they should consider lowering theirdoes not begin taking Social Security until how to maximize the amounts they can withdrawal amounts temporarily or athe or she stops working.) withdraw initially from their retirement least holding their annual withdrawals Keep in mind that, for those who con- savings without running out of money flat for a while instead of increasingtinue working and begin Social Security during their lifetimes. them for inflation. Extensive analysisbenefits prior to attaining full retirement While working longer, saving more, by T. Rowe Price has demonstratedage (66 for most boomers), some benefits and delaying Social Security benefits can that this approach is much morecould be temporarily withheld depending increase total retirement income, decid- advantageous than, for example,on the amount of wages earned. ing on an appropriate initial withdrawal attempting to counteract a market In general, analyzing whether preretirees amount from portfolio assets and adjusting downturn by dramatically reducingshould decide to take benefits early, at age that amount as necessary can go a long the level of equities—and hence the62, or whether they would be better off in way toward lowering the risk that retirees long-term growth potential—in retir-the long run by waiting for increased bene- outlive their resources. ees’ portfolios.fits until as late as age 70 really depends on In most cases, “your ability to avoidwhether they can afford to delay receiving “No analysis can cover every contin- running out of money is driven more by gency,” Ms. Fahlund says. “But, in general,benefits, whether they are married, and, to your initial and subsequent withdrawalsome extent, how long they expect to live. an initial 4% withdrawal amount gives amounts than by your asset allocation preretirees a high probability of not hav- strategy, which for many investors is ing to worry about depleting their assets counterintuitive,” Ms. Fahlund says. too quickly, unless they retire into a severe bear market.” (For additional information on Monte Carlo analysis, refer to “Guidelines on Saving for Retirement” on page 3.) Exhibit 5. How Much Can You Withdraw in Retirement? The estimated probability of maintaining several initial withdrawal amounts throughout a 30-year Asset Allocation retirement without running out of money, depending on the investor’s asset allocation. This analysis In general, making minor adjustments to assumes pretax withdrawals from tax-deferred assets and can be applied to any size retirement portfolio. In this study, the initial withdrawal amounts are increased by 3% for inflation. a balanced portfolio in retirement has less impact on financial security than the other 30-Year Retirement Period three decisions. First-Year Stock/Bond Mix However, preretirees often make the Withdrawal Amount 80/20 60/40 40/60 20/80 serious mistake of assuming that the safest path in retirement is minimizing equity Simulation Success Rate* exposure to lower their market risk. 7% 28% 19% 7% 1% Instead, moderate exposure to equities is 6 45 38 24 7 recommended for diversification, growth 5 65 63 57 40 potential, sustaining real income, and pro- viding a “cushion” to cover unexpected 4 84 87 89 89 expenses during a 30-year retirement. *The probability of having at least $1 in the portfolio at the end of 30 years. The probability analysis Also, to increase the potential wealth that used for determining this is explained in “Guidelines on Saving for Retirement” on page 3. retirees could draw on in emergencies—or troweprice.com/retirementplanning | 1-800-638-5660 15
  • 18. to possibly leave more money to heirs—retirees could opt for somewhat higherallocations to equities, though that doescarry greater risk in market downturns. Ms. Fahlund advises retirees to main-tain at least a 40% allocation to equities,even into their 80s, and to keep no morethan 30% of their assets in cash or short-term bonds. “The bottom line,” she says, “is thatif you have too much set aside for emer-gencies in cash, which usually has a verymodest annual return, you run the risk ofnot keeping up with inflation and possi-bly running out of resources from whichto take withdrawals. And if you have toomuch invested in stocks, you lessen yourability to cope with market uncertaintiesand run the risk of having to sell equitiesduring a market setback to provide forincome or unexpected contingencies. “The answer is to maintain a balanced,diversified portfolio—with moderategrowth potential and a moderate riskprofile. “With all of these critical decisions—when to stop working, when to starttaking Social Security, how much to with-draw from your portfolio in retirement,and determining the right asset allocationstrategy—the overarching concepts areto maintain flexibility in your plans forretirement and make thoughtful decisionsregarding financial matters that are underyour control,” she adds. “Such preretirement planning can helpoptimize your financial prospects foryears to come.”16 troweprice.com/retirementplanning | 1-800-638-5660
  • 19. Living in Retirement.
  • 20. Plan for a successful Retirement>> While you were accumulating your retirement savings, chances are you evaluated your investment strategy regularly to ensure that you were still on track with yourlong-term objectives. But what you may not realize is that consistently evaluating your invest-ment strategy is just as important once you’re retired and drawing on your retirement assets.Here are some proven ways to help make your retirement a success.“A good technique is to closely moni- for your next car and earn a 5% after- expenses later in life, now is probablytor your income and spending as you tax annual rate of return, in five years the best time to buy it—while you areprogress through retirement so you of investing you will have accumulated insurable and your premiums are stillcan continue to evaluate whether your almost $17,000, which could go a long reasonable. “Since most people want tooriginal projections are on target,” says way toward purchasing that car.” continue living at home, you may wantChristine Fahlund, CFP®, senior finan- And remember that if most of your to think of this as ‘stay-in-my-own-cial planner with T. Rowe Price. It is retirement savings are in tax-deferred home’ insurance,” says Ms. Fahlund.important to recognize that it is the investment accounts, you will most Rethink your plans if your retirementsequence of returns, not just their average likely owe income taxes on your pretax housing choices are costing you more thanthat can make a difference in how long contributions and any earnings when you thought they would. You may want toyour retirement assets may last. A few you withdraw the assets. So you may consider moving to a residence that is lesspoor-performing years in the very early have less to spend than your actual with- costly and/or easier to maintain. “Don’tpart of your retirement—combined with drawal amount. buy anything that might involve taking onan overzealous withdrawal strategy— new mortgage debt,” says Ms. Fahlund.could deplete your retirement savings Fine-Tune Your “Instead, buy something less expensiveprematurely. Therefore, by reviewing Investment Strategy than your current dwelling so you can uti-your strategy at least once a year you can Knowledgeable investment choices can lize the profits from the sale to add to yourdecide whether you will need to reduce enhance the potential of your long-term reserves.” Also, you may want to compareyour planned withdrawal amounts in retirement assets. “The growth potential what your cost of living might be if youthe coming year to better preserve your of stock exposure may reduce the risk moved to another part of the country—assets. In fact, if you experience very that inflation will significantly decrease say, to be closer to your children or grand-positive market returns for several years the purchasing power of your portfolio children.in retirement, you may actually be able during retirement,” says Ms. Fahlund. Building in financial safeguards willto adjust your withdrawals to boost your “Retirees who think they should be enable you to enjoy this new phase ofincome further. holding 20% of their retirement sav- your life—whatever you choose to do. ings in equities need to reconsider this For some retirees, it may mean embark-Adapt Your Budget approach.” Ms. Fahlund notes that in ing on a new career or extensive travel. IfToday’s retirees could spend up to order to keep pace with inflation, those you find you need additional retirementone-third of their lives in retirement. investors in and approaching retirement savings, working part time is one way toWith increased life expectancies, retire- should consider an allocation to equities help close any gap between retirementment portfolios need to provide income of 60% to 40%, gradually decreasing spending and income.for longer periods than previously your equity exposure to 30% and 20% in Retirement planning isn’t limitedanticipated. In order to sustain your your 80s and 90s. to something you do only before youretirement income, it’s important to retire; it’s an ongoing process of review-reexamine your budget periodically to Take Control ing and fine-tuning. Given today’sdetermine whether you’re spending Successfully managing your retirement longer life spans, you and your spousewithin your means. also involves anticipating life occurrences may live 30 years or more in retirement. In addition, it’s helpful to separate non- that might affect your finances. For Reexamining your financial plans afterdiscretionary expenses from discretionary example, if you haven’t already, make your first years in retirement and assess-ones, creating a list of what you need a decision about long-term care (LTC) ing them on a regular basis can helpversus what you may want. “It should insurance. This insurance can help cover ensure that you have the assets you needbe a red flag if you’re not paying your nursing home costs or assistance in your to last your lifetime.credit card bills in full every month,” own home, should it become necessary.says Ms. Fahlund. “Try to avoid acquir- The older you are, the more LTC insur-ing new debt by budgeting for big-ticket ance is likely to cost. If you think youreplacements, such as large appliances. may want LTC insurance to protect youFor example, if you save $250 per month and your spouse from potentially costly18 troweprice.com/retirementplanning | 1-800-638-5660
  • 21. determining a Realistic Withdrawal Amount and Asset Allocation>> Many people look forward to retirement, but it can be one of the most complicated stages of life from a financial planning point of view. In addition to charting a suit-able investment strategy, retirees need to consider estate planning issues, health insuranceneeds, and—one of the thorniest decisions—how much they can afford to spend each monthwithout jeopardizing their future financial security.Retirees must consider the risk of out- of retirement, assuming this amount is of maintaining an initial 4% to 5% with-living their assets. How should they increased by 3% annually to keep pace drawal amount.reconcile that possibility with a desire with inflation throughout retirement. What if this investor decided to retireto maximize annual income so that “No analysis can predict the future, earlier? Although the same strategy at agetheir retirement years are as fulfilling but a 4% initial withdrawal gives you a 60 (assuming a 25-year retirement period)as they expect? high probability that you won’t run out may offer only a 50/50 chance of sustain- “For many investors, the most impor- of money, using a reasonably diversified ing a 6% initial withdrawal amount, 5%tant issue to focus on when they retire is investment strategy,” Mr. Cleary says. would be more reasonable. If the invest-choosing a sustainable monthly income “Once you go much over that percent- ment horizon were extended to 30 years,amount,” says Todd Cleary, head of age, you have to start worrying about the investor would have to consider a 4%financial planning for T. Rowe Price. the possibility of depleting your assets initial withdrawal to achieve a high prob-“The effective resolution of the other too quickly.” ability of not running out of money.planning issues, including your investment “There’s a big leap between a 20- andstrategy, is driven by this key decision.” Determining the Odds 30-year retirement horizon,” Mr. Cleary Also, with more people retiring with- Instead of relying on an average annual says. “If you are planning for more thanout guaranteed pension income due to rate of return projection, T. Rowe Price’s 20 years, you have to consider lowerthe prevalence of defined contribution program models thousands of possible initial withdrawal amounts and having atretirement plans, longer life expectancy, market scenarios to determine the prob- least a 40% to 60% equity exposure.”and potential changes in Social Security, ability of success for a broad variety ofit has become more important than ever retirement withdrawal strategies. Effect of Portfolio Strategyto develop a realistic income plan that can The tables on the next page show “We have found that your ability to avoidmaintain purchasing power over a long the estimated probability (simulation running out of money in retirement isperiod of time, perhaps 20 to 30 years. success rate) of maintaining various driven more by your initial withdrawal Determining a reasonable initial with- spending rates throughout retirement, amount than your asset allocation strategy,drawal amount from your retirement depending on the investor’s initial so investors should focus on that first,”assets will be influenced by various fac- withdrawal amount, time horizon, and says Christine Fahlund, CFP®, a seniortors, including your expectations for asset allocation. The analysis reflects a financial planner at T. Rowe Price. Thoseinvestment returns and inflation, your broad range of investment and spend- who begin retirement with a conservativelifestyle, health concerns, how long ing strategies tested over 100,000 pos- withdrawal amount, such as 4% of theiryou expect to live, how much money sible scenarios of market performance. starting balance, and are planning on ayou may want to leave your heirs, and The guidelines can be applied for any 20- to 25-year time horizon do not neces-how much volatility you are willing to amount of retirement assets. sarily need to assume much volatility inassume in your investment portfolio. Many retirees may have to make trade- their investment approach. As indicated in Based on our experience with clients offs between how much they can spend, the chart on the next page, a strategy withand sophisticated computer analysis, the likelihood that they will be able only 20% invested in equities, a 4% initialthe firm’s planners suggest that people to sustain assets in retirement, and the withdrawal amount, and a 25-year timeshould probably spend more conserva- investment risk they are willing to take. horizon has a 98% simulation success rate.tively than they expected if they want to For example, the model indicates that However, if you want to spend morebe reasonably sure of not depleting their an investor retiring at 65 with a 20-year or plan on the possibility of living lon-assets prematurely. investment horizon using a balanced ger or would like to create a cushion Taking into account inflation, the vari- portfolio (60% stocks, 30% bonds, and for emergencies or for your heirs, theability of market returns, and average life 10% short-term bonds) has a 75% chance asset allocation decision becomes moreexpectancy, they conclude that a relatively of maintaining a 6% initial withdrawal important. Under these circumstances,“safe” initial withdrawal amount is about amount (with 3% annual increases) and “Our analysis shows that retirees with4% to 5% of portfolio assets the first year an extremely high probability (over 90%) long time horizons [about 30 years] troweprice.com/retirementplanning | 1-800-638-5660 19
  • 22. * The following asset allocations include How Much Can You Withdraw in Retirement? short-term bonds: 60/40 includes 60% The table shows the estimated probability of maintaining several initial withdrawal stocks, 30% bonds, and 10% short-term bonds; 40/60 includes 40% stocks, 40% amounts throughout retirement, depending on the investor’s asset allocation and bonds, and 20% short-term bonds; and time horizon. The analysis assumes pretax withdrawals from tax-deferred assets 20/80 is composed of 20% stocks, 50% bonds, and 30% short-term bonds. and can be applied to any size retirement portfolio. ** T. Rowe Price has analyzed a variety of retirement spending strategies using 20-Year Retirement Period computer simulations to determine the Initial Stock/Bond Mix* likelihood of “success” (having at least $1 Withdrawal Amount 80/20 60/40 40/60 20/80 remaining in the portfolio at the end of Simulation Success Rate** the retirement period) for each strategy, 7% 56% 52% 44% 26% shown as a percentage in each grid. The 6 74 75 75 71 analysis for each retirement strategy is 5 89 92 95 97 based on running 100,000 hypothetical 4 97 99 99 99 future market scenarios that account for a wide variety of return possibilities. The 25-Year Retirement Period initial withdrawal amount is the percent- Initial Stock/Bond Mix* age of assets withdrawn at the beginning Withdrawal Amount 80/20 60/40 40/60 20/80 of the first year of retirement as a lump Simulation Success Rate** sum made at the beginning of each year 7% 39% 30% 17% 4% and is inflation adjusted (3%) annu- 6 57 53 44 25 ally. Investment scenarios are based 5 77 78 78 73 on hypothetical (not historical) annual 4 91 94 97 98 rates of return for the three asset classes represented in the portfolio mixes. The 30-Year Retirement Period return assumptions of 10.00% for stocks, 6.50% for bonds, and 4.75% for short-term Initial Stock/Bond Mix* bonds are based on our best estimates Withdrawal Amount 80/20 60/40 40/60 20/80 for future long-term periods. The assumed Simulation Success Rate** expense ratios for these asset classes are 7% 28% 19% 7% 1% 1.211% for stocks, 0.726% for bonds, and 6 45 38 24 7 0.648% for short-term bonds. 5 65 63 57 40 4 84 87 89 89 These examples present only a range of possible outcomes. Actual results will vary 35-Year Retirement Period with each use and over time, and such results may be better or worse than the Initial Stock/Bond Mix* simulated scenarios. Withdrawal Amount 80/20 60/40 40/60 20/80 Simulation Success Rate** Source: T. Rowe Price Associates, Inc. 6% 37% 28% 14% 2% 5 57 52 41 19 The second row, based on the same 4 78 79 77 71 simulation analysis, shows the median 3 93 96 98 99 percentage of each portfolio’s originalFor additional information on Monte Carlo analysis, refer to “Guidelines on Savings for purchasing power remaining after 30Retirement” on page 3. years, expressed in today’s dollars. Inshould generally have no more than 20% cushion) the investor has to fall back on half of the simulated scenarios, eachto 30% of their assets in cash and that during retirement or to leave behind. The portfolio strategy had a balance equalthey should keep at least 30% to 40% table on the next page reflects a couple to at least this percentage of its startingin equities,” according to Jerome Clark, of measures of retirement security. value, adjusted for inflation.Asset Allocation portfolio manager. The top row shows the probability For example, if the investor retired “If they have a much bigger cash posi- (simulation success rate) that the investor with $500,000, of which 60% was intion than that and consequently trim will not run out of assets in retirement equities, 30% in bonds, and 10% intheir equity exposure, they increase the and sustain this income stream, based short-term bonds, it is likely that, afterlikelihood of failing to maintain income on various portfolio strategies tested a 30-year retirement period, the portfo-throughout their retirement years.” over 100,000 potential market scenarios lio would still have a median balance of and assuming a 4% initial withdrawal $395,000 in current dollars (79% of itsCreating a Cushion amount. With this conservative original value). With a 20% equity posi-Pursuing a moderately growth-oriented withdrawal, each of the investment tion, on the other hand, the T. Roweinvestment strategy in retirement may strategies provides more than an 80% Price analysis suggests that the medianalso increase the amount of wealth (or chance of not running out of money. balance would be only $180,000, or 36%20 troweprice.com/retirementplanning | 1-800-638-5660
  • 23. of the original value. (The “median” port- at least a 70% simulation success rate To further cope with market uncer-folio ending balance for a single strategy or chance of not running out of money. tainty and reduce the chances of havingis the one in which half of the projected They also advise planning on a 30-year to sell investment assets during a marketending balances are greater than this retirement horizon if the retiree is in his setback to meet unexpected contingen-amount and half are less.) or her early to mid-60s. While that may cies, retirees are also advised to maintain If the initial withdrawal amount were seem like a long time for maintaining a reserve or emergency savings account5% instead of 4%, not only do the simu- retirement income, the IRS life expec- of extremely liquid, short-term invest-lation success rates drop sharply, but so tancy tables estimate that a 60-year- ments that is not used to generatedo the projected median portfolio bal- old individual should live, on average, monthly income in retirement.ances after 30 years. In this case, in half another 25 years. But that means half of Finally, retirees are urged to withdrawthe projections the retirement income those age 60 today are expected to live assets from their accounts in a tax-strategy invested in a 60/30/10 portfolio longer than that. efficient manner (generally preservingcould still provide purchasing power Those who want the assurance that tax-deferred assets as long as possible),of 26% of its original value, while the at least a portion of their retirement to take minimum distributions from20/50/30 portfolio, with the same 5% income is guaranteed for life might also their IRA and other retirement accountsinitial withdrawal amount, might have consider a fixed or variable annuity for as required, and to carefully reviewrun out of money by that time. part of their assets, especially if they do their beneficiary designations for these “Generally speaking, maintaining or not have guaranteed pension income. accounts periodically.conserving your purchasing power may Depending on their particular situa- Once an income strategy in retire-benefit you and your family in several tion, a deferred or an immediate annuity ment is determined, the plan should beimportant ways,” Ms. Fahlund says. might be more appropriate. reviewed annually, especially if your port-“You are likely to have more assets in With the shift toward defined con- folio suffers a decline in value, you haveyour investment portfolio throughout tribution plans (such as 401(k) plans), to withdraw more than you had planned,retirement to cover special events as well many retirees must now assume the or your personal circumstances change.as medical expenses or other emergen- risk of providing themselves an income By carefully developing your retire-cies, to have more investable assets to through all market environments over ment financial plan now and under-generate income if you outlive your pro- a potentially long time. For that reason, standing the possible effects of time,jected life expectancy, and to have more shifting some of that risk to an insurance spending rate, and investment approachassets to leave your heirs, as well.” company for a fee may be appealing. on its potential success, you can reduce Many decisions related to the purchase the financial stress often associated withCoping With Uncertainty and annuitization of the particular insur- retirement and avoid having to makeIf you expect to rely on your investment ance products, however, are irrevocable, undesirable adjustments along the way.assets as the primary source for your so it is very important to understand theretirement income, T. Rowe Price plan- consequences of each choice before tak-ners suggest choosing a strategy that has ing action. Impact of Portfolio Strategy on Retirement Security 4% Initial Withdrawal Amount With 30-Year Retirement Period Portfolio Strategy Percentage invested in stocks, bonds, and short-term bonds 80/20/0 60/30/10 40/40/20 20/50/30 Simulation success rate for sustaining retirement income1 84% 87% 89% 89% Percentage of original portfolio’s purchasing power after 30 years (median wealth)2 99% 79% 59% 36% Median wealth after 30 years based on $500,000 portfolio at retirement (in current dollars)2 $495,000 $395,000 $295,000 $180,000 The simulation success rate reflects the probability of sustaining retirement income over 30 years for each portfolio strategy based on 100,000 1 potential market scenarios, assuming 4% of portfolio assets is withdrawn the first year of retirement and that amount increases by 3% each year for inflation. Return assumptions, net of estimated expenses, include 8.79% for stocks, 5.78% for bonds, and 4.10% for short-term bonds. This reflects the median percentage of the portfolio’s original purchasing power remaining after 30 years based on a 4% initial withdrawal amount 2 with 3% inflation adjustments to the withdrawal amount annually. So in half the simulated scenarios for each strategy, the portfolio had an ending balance of this amount or more. For example, if the investor retired with $500,000 in assets, after all withdrawals the portfolio with 80% invested in stocks retained 99% of its purchasing power after 30 years, or $495,000 in current dollars. The portfolio with 40% in stocks would have a pur- chasing power of 59% or more in half the cases. So pursuing a more aggressive strategy in retirement may increase the chance of having a bigger cushion for emergencies or having more money to leave to heirs. troweprice.com/retirementplanning | 1-800-638-5660 21
  • 24. Strategies for Coping After Retiring Into a Bear Market>> Retirees should have a plan for sustaining their income over a 30-year retirement. But the best-laid plans can be upset if they find they’ve retired into a bear market.In general, if retirees limit their initial retirement has a higher cost because The T. Rowe Price analysis assumeswithdrawals to 4% of their invest- it’s money that won’t be invested to that an investor retires with a $500,000ment portfolios—and then increase that earn returns in succeeding years when portfolio invested 55% in equities andamount by 3% a year for inflation—they the markets recover,” says James 45% in bonds, takes 4% of his or her port-should stand an almost 90% chance Tzitzouris, Jr., investment analyst on folio ($20,000) the first year, and increasesof being able to sustain that income T. Rowe Price’s asset allocation team, that amount by 3% each year to keep upstream over 30 years without running who conducted the simulation study. with inflation ($20,600 in the second year,out of money, according to a T. Rowe “And the less they have invested after $21,218 in the third year, etc.).Price Investment Analysis Tool using a bear market, the less potential they Based on a sophisticated methodol-thousands of potential market simula- have to benefit from the compounding ogy involving 10,000 simulated portfoliotions. But what if they happen to retire of any earnings in subsequent years.” outcomes, this investor stands an 89%near the start of a bear market? The • Cutting back on withdrawals may chance of having enough left in the port-short answer is that bear markets can be be necessary: If retirees find that they folio to sustain this rate of withdrawalsdevastating for new retirees who do not have retired into a bear market, the over a 30-year time span. (See article ontake action to compensate. While their most effective tactic to sustain a high page 3 for a detailed description of thisinstinct may be to flee the risk of equity chance of not outliving their assets is probability analysis.)markets, a more effective strategy, as a to cut back significantly on the amount The analysis showed that if the inves-new T. Rowe Price analysis shows, is to of money they withdraw from their tor’s portfolio had an average annualizedtemporarily reduce annual withdrawals portfolios. Or, if that approach is too return that ranged from less than 0%from their nest eggs. drastic, they can choose to keep their to less than 5% in the first five years of “Our research shows that withdraw- annual withdrawal amounts constant retirement and continued the originaling too much in retirement—particularly rather than increasing them each yearearly in retirement—is the most likely for inflation as originally planned.cause of running out of money,” saysChristine Fahlund, CFP®, a seniorfinancial planner with the firm. “That’swhat you need to adjust, and the sooner For Retirement Success, the First Five Years Are Criticalthe better.” Odds of Success Plummet if Withdrawal Amount Exceeds Portfolio Returns Bear markets—sometimes defined as 100% Projected Probability of Success* 89%a drop in the S&P 500 Index of at least 9020%—are not infrequent. Over the last 80 74% 69%80 years, one has occurred about every 70 64% 60 57%three years, with an average duration 51% 50 43%of about one year and an average 40decline of 35%, according to Ned Davis 30Research. Recent retirees may be review- 20ing their investment and spending plans 10 0as a result of the sharp decline in the At 4% to 3% to 2% to 1% to 0% to Lessequity markets. Retirement1 <5% <4% <3% <2% <1% Than 0% T. Rowe Price recently analyzed the Annualized Return in First Five Years of Retirementeffect of having retired into such poor This chart shows the probability of not running out of money over a 30-year retirement for anmarket environments. The study shows: investor who withdraws 4% of his or her portfolio the first year and increases the annual withdrawal• The first five years of retirement are amount by 3% for inflation. If portfolio returns are weak in the first five years and the investor does critical: Poor market performance or not cut back on the amount withdrawn, the likelihood of not running out of money can drop sharply from the 89% probability of success at the start of retirement. outright losses in the first five years Analysis assumes a static portfolio composed of 55% stocks and 45% bonds. significantly increase the chances of 1 Assumed returns and fees: U.S. large-cap stocks, 10.0% with 1.211% fees; investment-grade a retired person outliving his or her bonds, 6.50% with 0.726% fees. The example does not take into account income taxes or required money during a 30-year retirement. minimum distributions. “The reason for this is simple: Any *Chances of not running out of money over a 30-year retirement period assuming different annualized rates of return in the first five years of retirement. These projections are based on 10,000 money that retirees take out of their potential scenarios of market outcomes. portfolios or that they lose in mar- ket declines in the first five years of22 troweprice.com/retirementplanning | 1-800-638-5660
  • 25. plan of withdrawals, the chance of suc- Options in Bear Markets (starting January 2008) are projectedcess declined significantly. Instead of an So what can new retirees do if equity based on a range of simulated outcomes.89% chance of success at the outset, the markets suddenly turn sour just as they (See chart below for assumptions aboutprobability of being able to sustain with- begin to withdraw income from their varying asset class returns and expenses.)drawals over the next 25 years declined portfolio? Plenty. Retirees in this situ- During the period studied, the S&Pto as low as 43%. (See chart on page 22.) ation can still have sufficient retirement 500 Index of large-cap stocks fell from “If you are taking out more than you savings if they are willing to confront January 1, 2000, to September 30, 2002,are earning from your portfolio in the two things they really can control: how by 42.5%, but from then to January 31,early years of retirement, you are prob- much they withdraw from their portfo- 2008, it recovered with an 86.4% gain.ably digging a big hole in your plan,” lios and their overall asset allocation. For the entire period, the hypotheticalMr. Tzitzouris says. To examine how a retiree might cope diversified portfolio of 55% equities/45% This analysis also looked at the effect with an actual bear market and how bonds achieved an overall gain of 34.6%of running into a bear market during effective different strategies might be, the net of expenses.the second five-year period—years six analysis assumes retirement on January 1, At the bottom of this three-year bearthrough 10 of a 30-year retirement—after 2000, with the same portfolio strategy and market in 2002, the retiree’s portfolioa random set of market returns during initial withdrawal amount cited earlier. had declined 15.3% due to investmentthe first five years. In that case, a bear This analysis uses historical market performance, and the original $500,000market also had a negative impact on the returns from January 1, 2000, through balance (after that decline and threeinvestor’s chances of not running out of January 31, 2008, a period that included a years of withdrawals) stood at aboutmoney, but to a significantly lesser degree. deep bear market that ended September 30, $374,000. At this point, the analysis 2002, followed by a healthy recovery into shows that the chances of continuing the late 2007. Returns over the remaining 22 original withdrawal strategy throughout years of the 30-year retirement period the remaining 27 years in retirement Options When Retiring Into Bear Markets In Downturns, Retirees Can Sustain a High Probability of Success by Withdrawing Less or Holding Withdrawals Flat The chart below outlines four options for handling a 30-year retirement account, starting January 1, 2000, with an account balance of $500,000 invested in a 55% equity/45% bond portfolio. In this hypothetical example, the retiree withdraws 4% (or $20,000) the first year and increases that withdrawal amount by 3% annually to keep up with inflation. Actual returns for stocks and bonds are used for the period January 1, 2000, through January 31, 2008, and projections thereafter are based on 10,000 simulations of possible future market scenarios. The four options below assume the investor retired on January 1, 2000, just before the start of a severe bear market. By September 30, 2002, stocks (as measured by the S&P 500 Index) had declined 42.4% and the investor’s diversified portfolio had declined by 15.3% (assuming that the 55%/45% asset allocation was maintained). The table reflects the impact of that bear market on the investor’s chance of not running out of money over a 30-year retirement—as well as the impact of making certain adjustments to compensate for the misfortune of retiring into a bear market. Past performance cannot guarantee future results. This chart is for illustrative purposes only and does not represent the performance of any specific security. Monthly Monthly Withdrawal Portfolio Withdrawal Odds of to Restore 89% Account Status Value Amount Success* Odds of Success At retirement on January 1, 2000 $500,000 $1,667 89% At bear market bottom, September 30, 2002 374,096 1,768 57 $1,325 Results as of January 31, 2008, Assuming Four Different Strategies: OPTION 1: Continue withdrawals as planned $447,375 $2,111 78% $1,883 OPTION 2: Best Outcome Reduced withdrawal amount on September 30, 2002, by 25%  to restore original 89% probability of success 484,245 1,582 99 2,038 OPTION 3: Take no annual inflation adjustments until January 1, 2004 461,799 1,932 89 No action required OPTION 4: Worst Outcome Switched to 100% bond portfolio on January 1, 2003 337,753 2,111 5 Not feasible *Represents the percentage of total simulations in which the investor does not run out of money during a 30-year retirement period. The odds of success on January 1, 2000, reflect the initial investment and withdrawal assumptions. The odds of success at the various stages of the options reflect historical return data and any changes in the investment or withdrawal assumptions and projections thereafter. For his- torical returns, the S&P 500 Index is used for stocks and the Barclays Capital U.S. Aggregate Index is used for bonds. For simulations, stocks are expected to return 10% overall with a standard deviation of 15% and fees of 1.211%; bonds are expected to return 6.5% with a standard deviation of 5% and fees of 0.726%. Portfolios are rebalanced monthly and withdrawals are made monthly. This example does not take into account taxes or required minimum distributions. troweprice.com/retirementplanning | 1-800-638-5660 23
  • 26. without running out of money had This strategy proved more successful neared would be to delay retirement,declined from 89% to only 57%. than waiting until January 2008 to cut if possible. A separate T. Rowe Price As shown in the chart on page 23, back the withdrawal amount (Option 1) analysis shows that delaying retirementthis analysis examined the consequences or holding the withdrawal amount con- even a year or two can improve chancesof four options for coping with the stant until 2004 (Option 3). of having sufficient retirement savingsbear market: Switching to a 100% bond portfolio and increase the level of withdrawals.(1) Continuing to take withdrawals as (Option 4) proved unsuccessful, since planned and then lowering the with- this retiree would be virtually certain of No Predicting drawal amount on January 31, 2008, running out of money before the end of Investors should keep in mind that, while to that required to regain an 89% retirement. With this tactic, the investor assumptions about average market returns chance of not running out of money ended up with the highest monthly with- and volatility can be made with some con- during the balance of the 30-year drawal amount ($2,111) in January 2008, fidence over long periods, there is much retirement period. but the lowest portfolio value ($337,753) less certainty over short periods. No one(2) Lowering the withdrawal amount by and the lowest chance of success (5%). knows the depth or duration of any bear 25% on September 30, 2002—right “In this situation, some investors market or the strength of the recovery. after the bear market ended—to naturally might want to eliminate their That, again, underscores the need regain an 89% chance of success exposure to equities, but stocks have for investors to control what is within then raising the withdrawal amount historically provided the best chance of their power: the amounts of annual five years later on January 31, 2008, outpacing inflation over the long run,” withdrawals and long-term asset alloca- because the likelihood of not run- Ms. Fahlund says. “In this study, the tions. Starting with a conservative initial ning out of money over the next 22 retiree who kept the asset allocation withdrawal amount and perhaps cutting years had greatly improved due to intact but reduced withdrawals for a back when encountering sustained peri- the lower withdrawals and the stock few years did well, but the investor who ods of market decline can help mitigate market recovery. panicked and switched to 100% bonds the impact of such fluctuations on the(3) Taking a conservative approach by badly hurt the chance of having enough retiree’s long-term financial success. It holding the withdrawal amount con- money for retirement by getting out of may also enable investors to increase stant for the first four years until the equities just as the equity market was withdrawals later as markets recover. bear market had apparently passed poised to recover.” and then, starting in 2004, increasing One other option that the retiree the withdrawal amount by 3% annu- might consider if markets had already ally for inflation. suffered a significant decline as retirement(4) At the start of 2003, right after the bear market had ended, fleeing equities alto- gether by switching from a 55%/45% Performance of Stocks, Bonds, and Retirement Portfolio portfolio to a 100% bond portfolio. Total Return Indexed to 100 as of December 31, 1999, Through January 31, 2008 The most favorable outcome in termsof both monthly income and the pro- 180%jected median portfolio value at the 160end of the 30-year retirement was the 140second option: reducing the monthly 120withdrawal amount after the bear marketended in September 2002 (but continu- 100ing the annual inflation adjustment). 80 With the strong market recovery that 60 — Bonds (Barclays Capital U.S.followed, by January 2008 the investor had Bear Market Bottom Aggregate Index) 40an almost 99% chance of not running out 9/30/02 — Portfolio (55% Stocks/45% Bonds)of money, enabling a significant increase 20 — Stocks (S&P 500 Stock Index)in the monthly withdrawal amount at that 0time and still ensuring an 89% likelihood 12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 1/08of success, as originally desired. Among the four options, this strat- Annualized Return Bonds Stocks Portfolioegy ultimately provided, as of January January 1, 2000–September 30, 2002 10.5% -18.2% -5.9%2008, the highest withdrawal amount 12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 9.1 1/08($2,038) and the highest portfolio value September 30, 2002–January 31, 2008 4.8 12.4($484,245). January 1, 2000–January 31, 2008 6.7 0.9 3.724 troweprice.com/retirementplanning | 1-800-638-5660 180 160
  • 27. Tools and Resources.
  • 28. Your Financial Road map to successful Retirement>> It could be the birth of a child or grandchild, a rewarding career move, or the day you retire from your full-time career.As you continue to experience excit- Transitioning Into Your A Financial Road Maping new changes in your personal and Retirement Personalized Just for Youprofessional life, your financial goals Five years or fewer away from T. Rowe Price’s Advisory Planningwill also continue to evolve. Although retirement Services provide a comprehensiveyour financial situation is unique, if approach to portfolio and retirement Do you already imagine days filled withyou’re like most investors today, your planning. Based on the expertise of our travel, hobbies, volunteer work, andprimary financial goal is securing a professional advisory planning team— family? Preparing to retire is a specialcomfortable retirement. including certified financial plan- time for planning how you wish to Achieving this goal requires greater nerTM practitioners, we will develop spend the rest of your days. It’s alsostrategic planning than ever before. your unique financial strategy with per- a critical time of financial evaluationConsider that some of us may spend sonalized advice and solutions. and decision-making. Two of the mostclose to 30 years in retirement. Combined “The primary financial challenge for important financial decisions you’ll needwith longer life expectancy, we now face most investors is securing a comfortable to make are when to leave your full-timea much greater responsibility to save for retirement,” says Christine Fahlund, career and when and how much to beginour own retirement as Social Security and CFP®, senior financial planner at withdrawing from your investments. Apension assets account for a shrinking T. Rowe Price. “Yet our experience tells comprehensive assessment of your tran-percentage of retirement income. us that many people underestimate how sition strategy prior to retirement could Implementing a financial strategy much money they need to save and over- make the difference between meetingthat sets both preretirement savings estimate the amount of income they will your retirement income goals and notand postretirement income objectives be able to withdraw when they retire. being able to enjoy the retirement life-is essential for staying on track. In this “Our Advisory Planning Services style you had planned.article, we’ll explore the three stages of aim to put investors firmly in charge ofretirement planning and how T. Rowe Managing Your Retirement their financial futures by giving them thePrice is helping investors make a suc- Income keys for making appropriate decisionscessful transition with personalized Currently in retirement throughout the investment and retire-advice and solutions. ment planning process. T. Rowe Price As a busy retiree, managing your retire- advisory recommendations are basedSaving for Your Retirement ment income may be the last thing on your mind. But understanding—and on sophisticated analysis, our yearsMore than five years away from of investment experience, and, mostretirement following—an appropriate withdrawal strategy is absolutely essential for main- important, the personal conversationsThe promise of retirement may seem our counselors have with each of our taining your retirement income stream.very distant when you have much of investors to thoroughly understand their There are several factors you shouldyour career ahead of you. But keep in needs and preferences.” consider when designing or evaluat-mind that you may eventually enjoy a Our four-step process offers you the ing your personal withdrawal strategy,retirement that could span almost the best of our capabilities and one-on-one including maintaining an appropriatesame number of years you spent work- service: asset allocation, keeping up with infla-ing. Therefore, you should be saving at tion, planning for unexpected expenses, Step 1 Clearly Identifying Yourleast 15% to 20% of your salary annu- and providing a financial legacy for Financial Goalsally (including any employer matches) as future generations. If you are already Step 2 Providing Personalized Advicesoon as possible. By saving early in your retired, fine-tuning your withdrawal and Solutionscareer, your portfolio has sufficient time strategy sooner rather than later mayto grow through compounding. This Step 3 Assisting You With an have a significant impact on how longhead start can significantly minimize Implementation Plan your assets will last.the savings challenges you will face if Step 4 Helping You Stay on Track Withyou put off saving until you’re close Ongoing Advisory Checkupsto retirement.26 troweprice.com/retirementplanning | 1-800-638-5660
  • 29. We Offer Retirement Savings We Offer Retirement Income Learn More TodayAdvice With Portfolio Advice With Portfolio Advisory Planning Services areEvaluation Evaluation appropriate for investors with atOur investment advice and savings solu- Our investment advice and withdrawal least $100,000 or more in investabletions are designed to create a realistic solutions are designed to help ensure assets. Please note that the one-timesavings plan based on your desired that your assets will last throughout service fee of $250 will be waived forretirement income and anticipated your retirement. While you may find Enhanced Personal Services1 clientsretirement age. In some cases, we may that you need to decrease your with- and investors with $500,000 or more inrecommend that you set aside additional drawal amount, a timely adjustment investable assets with T. Rowe Price2assets in order to ultimately achieve can be a critical safeguard against the (including Retail and/or Brokerageyour retirement income goal. premature depletion of assets. assets). The fee will be reimbursed for investors bringing at least $100,000 inWe Offer Retirement Transition We Offer a Standalone Portfolio new assets to T. Rowe Price. We inviteAdvice With Portfolio Evaluation all other investors to take advantage ofEvaluation Our comprehensive portfolio evalua- our extensive guidance capabilities andOur investment advice and transi- tion is designed to help ensure that your resources.tion solutions are designed to help investments are closely aligned with For additional information, please visityou determine when to retire based your financial goals. Based on these us at troweprice.com/advisoryservices,on the annual retirement income you goals, we will evaluate your overall asset or contact a T. Rowe Price retirementdesire from your investments. We allocation and provide a recommended specialist at 1-800-638-5660 weekdayscalculate this amount as a supplement portfolio that positions you for future between 7 a.m. and midnight and onto whatever income you receive from opportunities. weekends between 8:30 a.m. and 5 p.m.Social Security, pensions, and part-time eastern time.employment. Advisory Planning Services are services of T. Rowe Price Advisory Services, Inc., a federally registered investment adviser. 1 Customers with $1,000,000 or more in assets invested with T. Rowe Price qualify for Enhanced Personal Services. Qualifying assets consist of T. Rowe Price Retail, Brokerage, variable annuity, and trust accounts. 2 Assets held in estate, corporate, and 401(k) accounts and 529 plans are excluded from the fee waiver criteria. troweprice.com/retirementplanning | 1-800-638-5660 27
  • 30. getting a Reality check on Your Retirement income PlanInterested in figuring out how much It then advises investors whether or not The calculator shows that takingincome your nest egg may provide in their desired initial withdrawal amount is out $1,800 a month the first year, withretirement without exhausting your reasonable given the resulting success rate annual increases to that amount of 3%money? The free, online T. Rowe Price as calculated by the tool (the odds of not for inflation, gives the investor onlyRetirement Income Calculator can help. outliving their assets over the designated about an 85% chance of success. For The calculator employs the same retirement period). It shows investors how 90%, the monthly withdrawal amountT. Rowe Price simulation tool used in their chances of success would change if would have to be decreased to $1,650.the article “Guidelines on Saving for they revise the amount of their with- The calculator also shows that theRetirement” on page 3. drawals. Investors can also see how the investor could withdraw more, $1,700 a This tool at troweprice.com/ric amounts they can withdraw might change month, with a more conservative assetenables investors to estimate the odds if they revise their asset allocation. allocation (40% stocks, 40% bonds, andof not running out of money depending For example, assume an investor plans 20% short-term bonds).on the size of their withdrawals and to retire at 65 with a $500,000 nest egg; The Retirement Income Calculatorportfolio strategy. wants a 90% chance of being able to is not a substitute for a comprehen- The calculator asks investors for their withdraw $1,800 a month (with inflation sive retirement income plan, but it canexpected retirement age, expected length adjustments) over 30 years without run- provide a quick reality check for manyof retirement, marital status, total retire- ning out of money; and plans to invest investors as they begin planning theirment assets, monthly income goal, and 60% in stocks, 30% in bonds, and 10% retirement income strategy.asset allocation strategy. in short-term bonds.28 troweprice.com/retirementplanning | 1-800-638-5660
  • 31. learn moreSelect Print and Online ResourcesResources Available From • Retirement Income Calculator Changing jobsT. Rowe Price (troweprice.com/ric) • Rollover IRA Guide These materials reflect more than a half- • T. Rowe Price Retirement (print)century of experience in investing and Readiness Guide This kit includes everything you needhelping individuals save for retirement, For investors five years or fewer from to open a Rollover IRA with T. Roweprepare to retire, or manage retirement retirement. This guide includes work- Price.income. We believe they may be helpful sheets for estimating initial retirement • Roll Over Your 401(k) Account to you as well. expenses, reviewing different sources Personal Guide of retirement income, and planning a (troweprice.com/personalguides)Saving tax-deferred (view or realistic withdrawal rate for assets. Are you unsure of what to do aboutdownload information online or your employer-sponsored retirementcall 1-800-638-5660 to order free kits) Checking your portfolio mix plan? We can offer you information • IRA • Morningstar® Portfolio Manager®* and insight on your choices. This tool • Roth IRA (troweprice.com/investmenttools) can help you roll over your employer- • Rollover IRA Log in to track, rebalance, and analyze sponsored retirement account assets • Inherited IRA your portfolio. It includes a complete and determine the investments that picture of all your holdings’ prices and best fit your investment approach.Setting up a small business performance—individual securities • Rollover Plannerretirement plan (view or and portfolios together—in a conve- (troweprice.com/rolloverplanner)download information online at nient one-page format that’s updated Use our Rollover Planner to createtroweprice.com/smallbusiness or throughout the trading day. a customized worksheet that willcall 1-800-638-3804 to order • Morningstar® Portfolio guide you through all the steps offree kits) X-Ray®* the rollover process. • SEP-IRA (troweprice.com/investmenttools) • SIMPLE IRA This comprehensive tool shows your *All Morningstar tools mentioned are offered • Individual 401(k) plan exposure to different sectors, stock by Morningstar, Inc. © 2010 Morningstar types, sub-asset classes, and global Associates, LLC. All Rights Reserved.Investing for retirement diversification. You also get a detailed• Personal Guides look inside your portfolio investments. (troweprice.com/personalguides) • Morningstar® Asset Allocator®* Building your retirement savings is hard (troweprice.com/investmenttools) work, and an IRA is one of the most effective retirement options you can use. This tool can help you learn more about IRA tax benefits, invest in the IRA that is right for you, and find the investments that best fit your invest- ment approach.• Online Investment Tools and Calculators (troweprice.com/investmenttools) T. Rowe Price offers a variety of tools and calculators that can help you keep track of your investments and guide you toward sound decisions as you plan your financial future. troweprice.com/retirementplanning | 1-800-638-5660
  • 32. Other Resources You May Find Helpful* The Securities and Exchange Commission (SEC) posts • Internal Revenue Service: irs.gov a list of noncommercial investor education sites at • Morningstar, Inc.: morningstar.com sec.gov/investor/links.shtml. You may also want to visit the sites listed below: • Pension Benefit Guaranty Corporation: pbgc.gov and sec.gov • American Association of Individual Investors: aaii.com • Social Security Administration: ssa.gov • American Savings Education Council: choosetosave.org/ballpark • U.S. Department of Labor: dol.gov/ebsa/publications Helpful savings tools such as the Ballpark “Top 10 Ways to Prepare for Retirement” and “Women Estimate Worksheet and Retirement Savings” are among free publications available • Certified Financial Planner Board of Standards: cfp.net/learn Click on “How to Choose a Planner” for information and advice about selecting a financial planner *These resources are listed as a convenience to our readers. T. Rowe Price is not responsible for the information contained on the Web sites.05175-14_C K09-060 5/1094538