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.
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.
Asset Allocation and Withdrawals from Investments:
The asset allocation for the investments you've included in FuturePath® has either been selected by you, or for aggregated assets, is provided using the Morningstar classification of individual securities and holdings within mutual funds to categorize them as stocks, bonds, or short term investments. Any percentage of holdings classified by Morningstar as "other" has been assigned to stocks.
Your target asset allocation presents a suggested allocation based on your age, or the age of your spouse/partner if they are older. This target reflects a suggested allocation of investments that has the potential to help your portfolio keep pace with inflation while reducing market volatility. There is no assurance that the recommended asset allocation will either maximize returns or minimize risk or be the appropriate allocation in all circumstances for every investor with a particular time horizon.
Your withdrawal amount from investments is displayed in today's dollars for the current year and is assumed to increase by 3% each year throughout the retirement horizon. These amounts do not take any taxes into account that may be due upon withdrawal.
The modeled asset class scenarios described above and your projected withdrawals from investments 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). This Simulation Success Rate is the primary component of the Confidence Number.
IMPORTANT: The projections or other information generated by FuturePath® 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.