Tuesday, July 31, 2012

T. Rowe Price retirement income calculator

The award-winning retirement planner from T. Rowe Price can assist you in calculating how much you may be able to spend each month and how long your savings will last. Using this retirement calculator, you can learn on how you can manage most effectively your financial assets and get the most value from your retirement savings.

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About T. Rowe Price

T. Rowe Price investment services group has a huge experience in managing finances for the 75 years. In 1937, as he opened his business, Thomas Rowe Price, Jr., advanced his growth stock theory, and it has stood the test of time. In 1950 he created the firm’s first mutual fund, the Growth Stock Fund, in response to the Uniform Gifts to Minors Act. The firm introduced its first segregated institutional client account in 1951 to meet the unique needs of institutional investors.

Over the decades, T. Rowe Price has been at the forefront of the industry with pioneering innovations including its natural resources strategy, the New Era Fund; its target-date Retirement Funds; and its defined contribution plan retirement services.

Service OverviewTop of Form
By using the online retirement planner you can get a better insight on how good your financial planning for retirement. Good thing is that using the service is fast and easy, so you can get input as fast as in 10 minutes or less.

The online guide will lead you through the process of data entry and will instantly feed the results:
  1. Begin by telling certain information about yourself, required for making informative recommendations.
  2. Evaluate your financial situation.
  3. Gain an interactive view of your retirement savings and income plan.
  • The retirement income 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.

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).

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Professional Service Review
Author: Kim Morton

What it does: You input income sources such as Social Security and pensions, as well as asset values and it projects the likelihood that your plan is sustainable through life expectancy, and provides suggestions (such as reduced spending) to make your plan sustainable.

Target audience (in retirement, near retirement etc.): From 20 years prior to retirement to living in retirement.

Not intended for: Those who don’t like detail or more than 10 questions.

Best Feature: Output graphs are very easy to understand with a side by side comparison and summary of inputs.

My personal opinion/first reaction: Four different input screens might be hard to navigate for someone who wants a quick answer. I like that it leaves the guess work out of things like rate of return by giving you probabilities based on possible market outcomes rather than assuming a fixed rate of return. It also gives you a percentage chance that you would make it to your desired life expectancy based on your current spending, and it tells you what you should spend if you want a 95% chance of not running out of money before your desired life expectancy.

Pros of the T. Rowe Price Retirement Income Calculator:
  • Works for both single or married.
  • May take a few minutes, but gathers a few personal details (like date of birth) so this makes the output more accurate.
  • Can select where you are in the retirement process: saving for, pre-retirement or retired.
  • Uses Monte Carlo simulations for rate of return and chances you would run out of money.
  • It has a picture and link to a calculator as well as a worksheet calculator to help estimate your expenses and such, which are nice features.
  • Short summary video presentation is provided after you have made your inputs. It tells you the likelihood that your savings will last to your age 95 based on your desired spending and income sources. If savings are not likely to last, it tells you what level of spending would be sustainable.
  • Can print a report directly to PDF.
  • Can modify a few assumptions to see a side by side comparison of results.
  • Assumptions and explanations are laid out below the results.

Cons of the T. Rowe Price Retirement Income Calculator:
  • All savings must be input together (taxable & tax deferred). Can’t designate if you have both and how much of each you have.
  • Must estimate your allocation between stocks, bonds and short-term investments… this is not easy to do if you have a lot of balanced funds and or multiple accounts. This information is used for the Monte Carlo simulations. In this trial I did 100% short-term.
  • Must include taxes in estimated expenses. Most people have no idea how to accurately estimate taxes.
  • Allows you to add Social Security income, but you can’t change the amount in later years, as you would need to do if you switched from a spousal benefit to your own benefit. Same restrictions for pensions.
  • Automatically assumes age 95 for longevity and you don’t have the chance to modify that assumption until the first trial has been run.

Visually appealing (Y/N): Yes

Ease of Use (Very Easy to Very Difficult): Moderately easy

What it does not do: If inputting as a married couple both have to have the same life expectancy and same retirement date. It does not allow inputs for part-time work. The other drawback of this retirement calculator, like most online retirement calculators, is the way it calculates taxes.

Taxes: Custom advice about when to take pensions, Social Security and how much to withdraw from which types of accounts can make a big difference in the amount of after-tax retirement income available to you. Most retirement calculators including this one, do not allow you to easily adjust these things and do not accurately calculate taxes, so decisions that could increase your retirement income or net worth can be missed.

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