Perspectives

Stuart Ritter Answers Your Questions

Q  from Bob Johnson 

First and foremost, will I even be able to afford to retire. And , if so, will it be comfortable enough and early enough to even be able to enjoy it In the first place? I think those are the main questions for the majority of us all….

A  from Stuart Ritter

 Bob, I think you’re right that these are some of the fundamental questions many people want the answers to – probably along with when they’ll be able to it.  As you might expect, it comes down to how much money you’ve saved by the time you leave the workforce.  Which means, to some extent, you control the answers by how much you’re saving and how long you work.  The more you save, the longer you save, the more likely you’ll be able to maintain your spendable income throughout your retirement.  You might want to start by checking out our Retirement Income Calculator (troweprice.com/ric).  It lets you put in your specific information on how much you’re saving and gives you a sense of how much you’ll be able to spend when you leave the workforce.  Then it lets you play “what if” to see what would happen if you saved more now, worked longer, etc.  Hope this helps give you a sense of when (not if!) you can retire.

 Q  from Vikas Gupta 

To maintain diversity in portfolio each year

 from Stuart Ritter

Vikas, I’m glad you’re asking about one of the fundamental tenets of a properly constructed portfolio.  Just as there are some people who want to drive a manual transmission car and there are those who prefer an automatic, you have two ways to maintain diversity: do it yourself or choose a service/investment that does it for you.  If you want to do it yourself, we have some guidelines to give you a starting point for spreading out the money you have invested in stocks and the money you have invested in bonds – Investor Time Horizon Chart

 If you prefer the “automatic transmission” approach, we have an automatic rebalancing service we offer in our IRA accounts – or you can choose an asset allocation investment like our Retirement Funds, Spectrum Funds, or Personal Strategy funds that are designed to automatically maintain diversity for you.

Q  from Emily Maurer 

I am already retired

A  from Stuart Ritter

 Emily, as you know, retirement planning doesn’t end with retirement!  Retirement is just a new beginning – of a phase that could last to age 95.  So good planning throughout retirement is key to making it what you want it to be.  I mentioned our Retirement Income Calculator to Bob; you might want to try it out also.  In addition, Advisory services are available for your consideration.

Q from Shan Mclendon

I have been a little slack in it I have only a few hundred in an IRA

A from Stuart Ritter

 Shan, the Tao Te Ching, attributed to Lao Tzu, says that “A far-reaching journey is begun from a small step.”  So congratulations on starting on that journey.  You are where you are.  How you arrived there (e.g., slacking or not) isn’t nearly as important as what you do from here on out.  The guideline we give people on how much to save is to put at least 15% of your household gross salary away for retirement each year.  And if you’re not there yet, put a plan in place to get there – maybe 10% this year, and increase that by two percentage points each year until you are.  (Note: The 15% includes your company match if you get one).  What you have is a good start, keep going.

Q from Janet Pearcy 

Just want to outlive my money

A from Stuart Ritter

 Janet, I really hope you meant that you want your money to outlive you (at least by a day!) so that you can maintain your lifestyle throughout your retirement.  To see whether you’re on track, try out the Retirement Income Calculator I mentioned.  It will give you a sense of how likely it is that your money will last longer than you.

Q from Eddie Galvan

 I’ve got a 401(k) to start with

A from Stuart Ritter

 Eddie, always a good place to start.  We recommend people save at least 15% for retirement.  Step one: Get whatever match your employer might be offering.  Next, consider using a Roth – either in your 401(k) if you employer gives you the option.  If not, consider a Roth IRA if you’re eligible, then go back to contributing to your 401(k) plan.  How much you save is the most powerful driver of your retirement success.  You’re starting in the right place; just make sure you’re completing the package.

 

The principal value of the Retirement Funds is not guaranteed at any time, including at or after the target date, which is the approximate date when investors turn age 65. The funds invest in a broad range of underlying mutual funds that include stocks, bonds, and short-term investments and are subject to the risks of different areas of the market. The funds emphasize potential capital appreciation during the early phases of retirement asset accumulation, balance the need for appreciation with the need for income as retirement approaches, and focus more on income and principal stability during retirement. The funds maintain a substantial allocation to equities both prior to and after the target date, which can result in greater volatility.

 Retirement Income Calculator results are presented as a snapshot of the first month in retirement. These estimates are displayed in today’s dollars and do not take any taxes into account that may be due upon withdrawal. The dollar amounts are assumed to increase by 3% each year throughout the retirement horizon. Any Social Security estimates are based on your current annual salary, current age, and age at retirement. The accuracy of the estimate depends on the pattern of your actual past and future earnings. The estimate may not be representative of your situation. Estimates for retirement ages prior to age 62 and some spousal estimates may also be included for illustrative purposes only. Visit socialsecurity.gov for more information.

 Monte Carlo Simulation

 Monte Carlo simulations model future uncertainty. In contrast to tools generating average outcomes, Monte Carlo analyses produce outcome ranges based on probability—thus incorporating future uncertainty.

 Material Assumptions Include:

 • Underlying long-term rates of return for the asset classes are not directly based on historical returns. Rather, they represent assumptions that take into account, among other things, historical returns. They also include our estimates for reinvested dividends and capital gains.

 • These assumptions, as well as an assumed degree of fluctuation of returns around these long-term rates, are used to generate random monthly returns for each asset class over specified time periods.

 • The monthly returns are then used to generate 1,000 scenarios, representing a spectrum of possible return outcomes for the modeled asset classes. Analysis results are directly based on these scenarios.

 • Required minimum distributions (RMDs) are included. In the simulations, if the RMD is greater than the planned withdrawal, the excess amount is reinvested in a taxable account.

 Material Limitations Include:

 • The analysis relies on return assumptions, combined with a return model that generates a wide range of possible return scenarios from these assumptions. Despite our best efforts, there is no certainty that the assumptions and the model will accurately predict asset class return ranges going forward. As a consequence, the results of the analysis should be viewed as approximations, and users should allow a margin for error and not place too much reliance on the apparent precision of the results. Users should also keep in mind that seemingly small changes in input parameters (the information the user provides to the tool, such as age or contribution amounts) may have a significant impact on results, and this (as well as mere passage of time) may lead to considerable variation in results for repeat users.

 • Extreme market movements may occur more often than in the model.

 • Some asset classes have relatively short histories. Actual long-term results for each asset class going forward may differ from our assumptions—with those for classes with limited histories potentially diverging more.

 • Market crises can cause asset classes to perform similarly, lowering the accuracy of our projected return assumptions, and diminishing the benefits of diversification (that is, of using many different asset classes) in ways not captured by the analysis. As a result, returns actually experienced by the investor may be more volatile than projected in our analysis.

 • The model assumes no month-to-month correlations among asset class returns (“correlation” is a measure of the degree in which returns are related or dependent upon each other). It does not reflect the average duration of “bull” and “bear” markets, which can be longer than those in the modeled scenarios.

 • Inflation is assumed to be constant, so variations are not reflected in our calculations.

 • The analysis assumes a diversified portfolio which is rebalanced on a monthly basis. Not all asset classes are represented and other asset classes may be similar or superior to those used.

 • Taxes on withdrawals are not taken into account, nor are early withdrawal penalties.

The analysis models asset classes, not investment products. As a result, the actual experience of an investor in a given investment product (e.g., a mutual fund) may differ from the range of projections generated by the simulation, even if the broad asset allocation of the investment product is similar to the one being modeled. Possible reasons for divergence include, but are not limited to, active management by the manager of the investment product, or the costs, fees, and other expenses associated with the investment product. Active management for any particular investment product — the selection of a portfolio of individual securities that differs from the broad asset classes modeled in this analysis — can lead to the investment product having higher or lower returns than the range of projections in this analysis.

Modeling Assumptions:

 • The primary asset classes used for this analysis are stocks, bonds, and short-term bonds. An effectively diversified portfolio theoretically involves all investable asset classes including stocks, bonds, real estate, foreign investments, commodities, precious metals, currencies, and others. Since it is unlikely that investors will own all of these assets, we selected the ones we believed to be the most appropriate for long-term investors.

 Results of the analysis are driven primarily by the assumed long-term, compound rates of return of each asset class in the scenarios. Our corresponding assumptions, all presented in excess of inflation, are as follows: for stocks, 4.90%, for bonds, 2.23% and for short-term bonds, 1.38%.

 • Investment expenses in the form of an expense ratio are subtracted from the return assumption as follows: for stocks 0.70%, for bonds, 0.60% and for short-term bonds, 0.55%. These expenses represent what we believe to be a reasonable approximation of investing in these asset classes through a professionally managed mutual fund or other pooled investment product.

Portfolio and Initial Withdrawal Amount:

 • The portfolio is either determined by the user or based on pre-constructed allocations that consider the user’s current age and shift throughout the retirement horizon (as displayed in the graphic “Why should I consider this?” in the Asset Allocation section).

 • The initial withdrawal amount is assumed to be distributed in 12 monthly payments at the beginning of each month for the year; in each subsequent year, the amount withdrawn is adjusted to reflect a 3% annual rate of inflation.

 • The modeled asset class scenarios and withdrawal amounts may be calculated at, or result in, a Simulation Success Rate. Simulation Success Rate is a probability measure and represents the number of times our outcomes succeed (i.e. has at least $1 remaining in the portfolio at the end of retirement).

IMPORTANT: The projections or other information generated by the T. Rowe Price Retirement Income Calculator regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. The simulations are based on assumptions. There can be no assurance that the projected or simulated results will be achieved or sustained. The charts present only a range of possible outcomes. Actual results will vary with each use and over time, and such results may be better or worse than the simulated scenarios. Clients should be aware that the potential for loss (or gain) may be greater than demonstrated in the simulations.

The results are not predictions, but they should be viewed as reasonable estimates.

Source: T. Rowe Price Associates, Inc.Copyright 2013, T. Rowe Price Investment Services, Inc, Distributor. All rights reserved.

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