1. Nothing Is Certain… Leave Nothing to Chance. Legacy Wealth Planning
Planning for retirement can be a daunting task. Many people can expect to spend nearly one-third of their lives in retirement. In 1960, a 65-year old person had a 10% chance to live to age 90. In 2000, 1 in 4 people were expected to live to age 90. And life expectancy is expected to continue to increase due to advancements in health care.
So how much will you need to live in retirement? The best estimate is based on your current circumstances. You can expect some expenses to increase during retirement (health care, travel) while others should decrease (mortgage, work-related expenses).
Here are some statistics that will shed light on investors’ thoughts about retirement:
Only 39% of working Americans think they will have enough money to live comfortably during their retirement
75% of workers think they will outlive their retirement assets
These statistics prove that investors need help planning for retirement.
The research within this presentation is different from others that you’ve seen since it attempts to help investors create a cushion that they can depend on for unexpected or higher than expected expenses, living longer, or legacy planning.
Source: Employee Benefit Research Institute, Retirement Confidence Survey, April 2004
For Financial Professional Use Only – Not For Use With The Public

2. High Level of Uncertainty
Nothing Is Certain
Not running out of money
How many years will you live in retirement?
Will your spouse outlive you?
Generating enough income to live on
Will you be able to maintain an “acceptable” standard of living?
Will you have higher than expected expenses in retirement?
Leaving assets to children or charities
What assets will you have for legacy planning?
What gifts can you make to your children, grandchildren, charities?
High Level of Uncertainty
The primary focuses of the retirees that T. Rowe Price works with are:
Not running out of money before the end of retirement
Generating enough income to live on
Leaving assets to children or charities
Some questions that these retirees are asking themselves are:
For how many years will I be in retirement?
Will my spouse outlive me? – The odds of at least one spouse of a 55-year old couple living to 95 years old is 45% and the odds of one of them living to 100 is 24% (Source: Citigroup Smith Barney, Equity Research, “The Next American Dream”, 4/ 22/04)
Will I have higher than expected expenses?
Will I have unexpected expenses? (i.e. medical)
What assets will I have for legacy planning?
What gifts can I give to my children, grandchildren, charities?
These are questions whose answers have a high level of uncertainty. You need to plan so that you have enough to live comfortably, and in case you, or your spouse, live longer than expected. And if legacy planning is part of your goal then you need to make sure you have more than enough for your needs so you can help others.
For Financial Professional Use Only – Not For Use With The Public

3. Leave Nothing to Chance
Controllable Factors
Contributions to nest egg
Initial withdrawal amount
Asset allocation
Three factors within your retirement plan that you can control contributions to your nest egg, initial withdrawal amount, and the asset allocation of the portfolio in which your money is invested. For the purposes of this presentation we will focus on the last two, withdrawal amount and asset allocation.
1. T. Rowe Price recommends an initial withdrawal amount no greater than 4% of your assets (this would be increased each year to account for inflation). However, while you may be able to choose your initial withdrawal amount, you may need to increase this either initially or later in retirement due to unexpected expenses (i.e. medical).
2. The asset allocation selected depends on your risk tolerance and returns expectations.
We can use T. Rowe Price’s Monte Carlo analyses to examine these factors and empower you to make informed decisions regarding your retirement.
For Financial Professional Use Only – Not For Use With The Public

4. Monte Carlo Definitions and Assumptions
Likelihood of Success: The percentage of simulations that result in at least $1 remaining in the portfolio at the end of retirement.
Median Purchasing Power: The 50th percentile value of assets in current dollars (assuming 3% inflation) remaining at the end of the retirement period1, expressed as a percentage of the original balance’s purchasing power.
Initial Withdrawal Amount: The percentage of the initial investment value withdrawn in the first year, increased annually by 3%, where the entire amount is withdrawn on the first day of the year.
Assumptions
100,000 simulations
Underlying asset classes: Stocks, bonds, and short-term bonds.1
Monte Carlo simulation is an analytical tool for modeling future uncertainty. In contrast to deterministic tools that model the average outcome, Monte Carlo simulation generates ranges of outcomes based on our underlying probability model. Thus, these outcomes incorporate future uncertainty, while deterministic models do not. For the following analyses we ran 100,000 simulations and used the underlying asset classes of stocks, bonds and short-term bonds.
There are some definitions used throughout this presentation relating to the Monte Carlo analysis which you should be familiar with.
Likelihood of Success – the likelihood that you will end your selected retirement period with at least $1.00 remaining in your portfolio
Median Purchasing Power – will help answer the question of how much may be remaining in your portfolio. [read definition] For example, if you have $1,000,000 of purchasing power at the beginning of your retirement, this will tell you the amount of purchasing power you may have at the end of the retirement period once you factor in your annual withdrawals, market return, and inflation. The analysis was conducted by running 100,000 simulations and giving you the outcome for the 50th percentile – 50% of outcomes are above and 50% below the result we’ll show you.
Initial Withdrawal Amount – [read definition]
1 The following allocations include short-term bonds: 60/40 is 60% stocks, 30% bonds, and 10% short-term bonds; 40/60 is 40% stocks, 40% bonds, and 20% short-term bonds; 20/80 is 20% stocks, 50% bonds, and 30% short-term bonds. See Monte Carlo disclosure page for more information.
For Financial Professional Use Only – Not For Use With The Public

5. Monte Carlo Disclosure
Monte Carlo Simulation
Monte Carlo simulation is an analytical tool for modeling future uncertainty. In contrast to deterministic tools (e.g., expected value calculations) that model the average case outcome, Monte Carlo simulation generates ranges of outcomes based on our underlying probability model. Thus, outcomes generated via Monte Carlo simulation incorporate future uncertainty, while deterministic methods do not. Monte Carlo analysis is described below:
Material Assumptions
The investment results shown in the tables were developed with Monte Carlo modeling using the following material assumptions:
The underlying long-term expected annual return assumptions for the asset classes indicated in the tables are not historical returns, but are based on our best estimates for future long-term periods. Our annual return assumptions take into consideration the impact of reinvested dividends and capital gains.
We use these expected returns, along with assumptions regarding the volatility for each asset class, as well as the intra-asset class correlations, to generate a set of simulated, random monthly returns for each asset class over the specified period of time.
These monthly returns are then used to generate 100,000 simulated market scenarios. These scenarios represent a spectrum of performance possibilities for the asset classes being modeled. The success rates are calculated based on these scenarios.
We do not take any taxes or required minimum distributions into consideration, and we assume no early withdrawal penalties.
Investment expenses in the form of an expense ratio are subtracted from the expected annual return of each asset class. These expenses are intended to represent the average expenses for a typical actively managed fund within the peer group for each asset class modeled.
Material Limitations
Material limitations of the investment model include:
Extreme market movements may occur more frequently than represented in our model.
Some asset classes have relatively limited histories. While future results for all asset classes in the model may materially differ from those assumed in our calculations, the future results for asset classes with limited histories may diverge to a greater extent than the future results of asset classes with longer track records.
Market crises can cause asset classes to perform similarly over time, reducing the accuracy of the projected portfolio volatility and returns. The model is based on the long-term behavior of the asset classes and, therefore, is less reliable for short-term periods.
The model assumes there is no correlation between asset class returns from month to month. This means that the model does not reflect the average periods of “bull” and “bear” markets, which can be longer than those modeled.
Inflation is assumed to be constant; variations in inflation levels are not reflected in our calculations.
The analysis does not take into consideration all asset classes. And other asset classes not considered may have characteristics similar or superior to those being analyzed.
For Financial Professional Use Only – Not For Use With The Public

6. Monte Carlo Disclosure
Model Portfolio Construction
Five model investment portfolios were designed by our investment professionals according to the principles of Modern Portfolio Theory, which is used to achieve effective diversification among different asset classes. An effectively diversified portfolio theoretically consists of all investable asset classes, including equities, 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. The asset classes used for the model portfolios are stocks, bonds, and short-term bonds. We did not consider real estate because of its illiquidity and the significant exposure many investors already have through home ownership. We believe the fixed-income asset class we chose fairly represents the broad, liquid, domestic capital markets. We selected short-term, investment-grade bonds to provide stability and eliminated any explicit allocation to cash because we believe that the investor is best positioned to determine his/her own allocation to cash based on his/her near-term needs.
The portfolios were constructed based on our analysis of the complementary behavior of asset classes over long periods of time, which enables us to identify investment mixes that offer greater efficiency through low correlation.
IMPORTANT: The projections or other information generated by the T. Rowe Price Investment Analysis Tool 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 a number of 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. Results may 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.
T. Rowe. Price has analyzed a variety of retirement savings strategies using computer simulations to determine the likelihood of “success” (having at least one dollar remaining in the portfolio at the end of the retirement period) of each strategy, shown as a percentage in each grid. Assumes a 30-year time horizon and a 4% initial withdrawal amount of the initial value of the investments withdrawn in the first year where the entire amount is withdrawn on the first day of the year; in each subsequent year, the amount withdrawn is adjusted to reflect a 3% annual rate of inflation. The simulation success rates range from 92% to 83%. The simulation success rates are based on simulating 100,000 possible future market scenarios and various retirement income strategies. The underlying long-term expected annual return assumptions (gross of fees) are 10% for stocks; 6.5% for intermediate-term, investment-grade bonds; and 4.75% for short-term bonds. The following expense ratios are then applied to arrive at net-of-fee expected returns: 1.211% for stocks; 0.726% for intermediate-term, investment-grade bonds; and 0.648% for short-term bonds. These examples only present a range of possible outcomes. Actual results will vary, and such results may be better or worse than the simulation scenarios.
The Monte Carlo analysis results are not predictions, but they should be viewed as reasonable estimates.
Source: T. Rowe Price Associates, Inc (TRPA).
T. Rowe Price Investment Services, Inc, Distributor (TRPIS).
TRPA and TRPIS are affiliated companies.
/07
For Financial Professional Use Only – Not For Use With The Public

7. Initial Withdrawal Amount
30-Year Retirement
Likelihood of Success
Initial Withdrawal
Amount 4% 5% 6% 7% 8%
Stock/Bond1 Mix
100/0 80/20 60/40 40/60 20/80
83%
86%
89%
91%
92% 67 69 68 63 49 50 49 42 29 10 35 31 22 9 1 24 18 10 2 –
More Likely Less Likely
You may have seen these tables before. The data shown is calculated using T. Rowe Price’s Monte Carlo analysis.
To read these tables, the vertical axis shows the initial withdrawal amount while the horizontal axis shows the asset allocation. The percentiles in the grid show the likelihood that you will have at least $1 at the end of the 30-year retirement period.
As mentioned earlier, T. Rowe Price recommends that retirees’ initial withdrawal amount is a maximum of 4%.
As you can see from the table, your initial withdrawal amount is of great importance when planning for retirement. A portfolio having a 4% initial withdrawal amount and invested in 80% stocks and 20% bonds would have a 86% chance of not running out of money within a 30-year period. If you increase the initial withdrawal amount to 5% your chance of having at least one dollar after 30 years would drop to 69%.
Increasing your withdrawal amount dramatically decreases your likelihood of success. Selecting a higher equity allocation helps to minimize the impact of increasing your withdrawal amount.
What if you live longer than 30 years?
What if your expenses are greater than expected and you need to withdraw a greater amount than planned?
Increasing your withdrawal amount dramatically decreases your likelihood of success.
Selecting a higher equity allocation helps minimize the impact of a higher initial withdrawal amount.
1 The following allocations include short-term bonds: 60/40 is 60% stocks, 30% bonds, and 10% short-term bonds; 40/60 is 40% stocks, 40% bonds, and 20% short-term bonds; 20/80 is 20% stocks, 50% bonds, and 30% short-term bonds. The underlying long-term expected annual return assumptions (gross of fees) are 10% for stocks, 6.5% for intermediate-term, investment-grade bonds, and 4.75% for short-term bonds. The following expense ratios are then applied to arrive at net-of-fee expected returns: 1.21% for stock, 0.73% for intermediate-term, investment-grade bonds, and 0.65% for short-term bonds. These results are not predictions, but they should be viewed as reasonable estimates. See Monte Carlo disclosure page for more information. Source: T. Rowe Price Associates, Inc.
For Financial Professional Use Only – Not For Use With The Public

8. Asset Allocation – 30-Year Retirement Likelihood of Success
Initial Withdrawal
Amount 4% 5% 6% 7% 8%
Stock/Bond1 Mix
100/0 80/20 60/40 40/60 20/80
83%
86%
89%
91%
92% 67 69 68 63 49 50 49 42 29 10 35 31 22 9 1 24 18 10 2 –
Asset allocation is also important in planning for retirement. Looking at this table, if you choose an initial withdrawal amount of 4%, you may decide on an asset allocation of 40/60 for a 30-year retirement period. The likelihood of not running out of money after 30 years with this portfolio would be 91%. But while looking at this table, you might think that you could be more conservative and choose the 20/80 portfolio and have a similar same simulation success rate, 92%.
Our new Monte Carlo analysis on Median Legacy Wealth, or Purchasing Power, can help answer the questions:
Why choose a more aggressive portfolio if the success rate is the same or slightly lower than another more conservative portfolio?
What if you live longer than 30 years?
What if your expenses are greater than expected and you need to withdraw a greater amount than planned?
More Likely Less Likely
The highlighted portfolios have essentially the same likelihood of having at least $1 remaining at the end of 30 years.
Legacy Wealth analyses can help distinguish the difference between their simulation success rates.
1 The following allocations include short-term bonds: 60/40 is 60% stocks, 30% bonds, and 10% short-term bonds; 40/60 is 40% stocks, 40% bonds, and 20% short-term bonds; 20/80 is 20% stocks, 50% bonds, and 30% short-term bonds. The underlying long-term expected annual return assumptions (gross of fees) are 10% for stocks, 6.5% for intermediate-term, investment-grade bonds, and 4.75% for short-term bonds. The following expense ratios are then applied to arrive at net-of-fee expected returns: 1.21% for stock, 0.73% for intermediate-term, investment- grade bonds, and 0.65% for short-term bonds. These results are not predictions, but they should be viewed as reasonable estimates. See Monte Carlo disclosure page for more information. Source: T. Rowe Price Associates, Inc.
For Financial Professional Use Only – Not For Use With The Public

9. What Is Median? 50% Above Below
Account Value
Above
50%
Below
This chart illustrates how we arrive at the Median Legacy Wealth or Purchasing Power results.
The orange line represents the median result – 50% of the outcomes are above this orange line and 50% are below it.
Throughout this presentation, when we’re reviewing the median legacy wealth or purchasing power keep in mind that we are giving you the middle outcome – it’s the 50th percentile of our 100,000 simulations. This is NOT the average of the outcomes. The average is not used since it is likely to skew the result if the simulations are overweighted either positively or negatively.
Years in Retirement
Median is the 50th percentile of simulations: 50% of the outcomes are above the median outcome, represented by the orange line in this illustration, and 50% below.
This is a hypothetical illustration. There are 11 simulations in this hypothetical example.
For Financial Professional Use Only – Not For Use With The Public

10. Median Purchasing Power
Example:
Initial Retirement Assets $1,000,000
Initial Withdrawal = 4% (increased by 3% annually) $40,000
Retirement Period Years
Portfolio
Median Purchasing Power2 (%)
Median Nominal Balance3 ($)
80/20
108%
$2,621,443
60/401
87%
$2,111,718
40/601
65%
$1,577,721
To understand Median Wealth or Purchasing Power let’s look at this example:
An investor begins retirement with $1,000,000 and withdraws $40,000 in the first year (or 4%), this amount is increased by 3% every year to account for inflation.
At the end of 30 years the investor has withdrawn more than $1.9 million dollars from his retirement account.
If this account has been invested in an 80/20 portfolio (80% stocks and 20% intermediate term bonds) then his median wealth or purchasing power would be 108%. This means that of the $1,000,000 he started with at retirement he has 108% of the original purchasing power remaining after 30 years (or $2.6 million); he has all of his principal and gained an additional 8%. [Keep in mind this is the median amount – 50% of the results are above and 50% are below.]
If his assets are invested in a 60/40 portfolio his median legacy wealth, or purchasing power, would be 87% (or $2.1 million). This means that the median results of our analysis had 87% of the original purchasing power, inflation-adjusted, remaining after 30 years. And with the 40/60 portfolio one would have 65% ($1.6 million) remaining after 30 years.
1 The following allocations include short-term bonds: 60/40 is 60% stocks, 30% bonds, and 10% short-term bonds; 40/60 is 40% stocks, 40% bonds, and 20% short-term bonds. The underlying long-term expected annual return assumptions (gross of fees) are 10% for stocks, 6.5% for intermediate-term, investment-grade bonds, and 4.75% for short-term bonds. The following expense ratios are then applied to arrive at net-of-fee expected returns: 1.21% for stock, 0.73% for intermediate-term, investment- grade bonds, and 0.65% for short-term bonds. These results are not predictions, but they should be viewed as reasonable estimates. See Monte Carlo disclosure page for more information. Source: T. Rowe Price Associates, Inc.
Median purchasing power is the 50th percentile value of assets remaining in current dollars (assuming 3% inflation) at the end of the retirement period, expressed as a percentage of the original balance’s purchasing power.
Median Nominal Balance is the 50th percentile value of assets remaining in dollar terms (not discounted for inflation) at the end of the retirement period.
For Financial Professional Use Only – Not For Use With The Public

11. Distinguishing Between Similar Simulation Success Rates
30-Year Retirement
Likelihood of Success
Median Purchasing Power
Initial Withdrawal
Amount
(increased by 3% annually) 4% 5%
Stock/Bond1 Mix
Stock/Bond1 Mix
100/0 80/20 60/40 40/60 20/80
100/0 80/20 60/40 40/60 20/80
83%
86%
89%
91%
92%
116%
108%
87%
65%
42% 67 69 68 63 49 57 51 35 17 –
More Likely Less Likely
Higher Lower
Median Purchasing Power data distinguish between two portfolios with similar success rates.
In this example, while the two portfolios have similar success rates, the 40/60 portfolio has a median purchasing power remaining that is 155% greater.
While our Monte Carlo analyses on previous pages looks at the risk in retirement: the risk of running out of money, this Monte Carlo analysis looks at the return potential.
If we use the example from the earlier slide, the investor who takes on more risk by investing in the 40/60 portfolio, compared to the 20/80 portfolio, would have essentially the same likelihood of having at least $1 remaining at the end of 30 years – 91%.
But the upside opportunity with the 40/60 portfolio vs. the 20/80 portfolio is dramatic. The investor in the 40/60 portfolio has a median legacy wealth, or purchasing power, of 65% --at the end of 30 years he would have 65% of his original purchasing power. The investor in the 20/80 portfolio would have 42% of his original purchasing power. The portfolio with the higher stock allocation would have 155% greater median legacy wealth, or purchasing power.
An investor who doesn’t know how long he’s going to live, or his spouse is going to live, or one who doesn’t know how many expenses he’ll have in retirement may want some cushion -- the portfolio that gives him the greater chance for upside and therefore greater protection from unforeseen events in retirement.
[Again, keep in mind the percentiles in the table are the median amount, the results of the 50th ranking in our analysis.]
1 The following allocations include short-term bonds: 60/40 is 60% stocks, 30% bonds, and 10% short-term bonds; 40/60 is 40% stocks, 40% bonds, and 20% short-term bonds; 20/80 is 20% stocks, 50% bonds, and 30% short-term bonds. The underlying long-term expected annual return assumptions (gross of fees) are 10% for stocks, 6.5% for intermediate-term, investment-grade bonds, and 4.75% for short-term bonds. The following expense ratios are then applied to arrive at net-of-fee expected returns: 1.21% for stock, 0.73% for intermediate-term, investment- grade bonds, and 0.65% for short-term bonds. These results are not predictions, but they should be viewed as reasonable estimates. See Monte Carlo disclosure page for more information. Source: T. Rowe Price Associates, Inc.
For Financial Professional Use Only – Not For Use With The Public

12. Impact of Greater Expenses
30-Year Retirement
Initial Withdrawal
Amount
(increased by 3% annually) 4% 5% 6%
Median Purchasing Power
Stock/Bond1 Mix
100/0 80/20 60/40 40/60 20/80
116%
108%
87%
65%
42% 57 51 35 17 – 1 – – – –
Higher Lower
Problem: Greater expenses in retirement may result in needing to increase your initial withdrawal amount.
Solution: To boost the median purchasing power remaining you may need to increase your equity allocation.
If you have greater expenses in retirement then you will have to increase your initial withdrawal amount. As you can see from the table, there is a significant difference in the median legacy wealth, or purchasing power, percentiles with 4% and 5% initial withdrawal amounts.
To make up the difference you might want to increase the allocation to stocks.
For instance, let’s say you are planning that in retirement you will withdraw 4% annually and you’ll be invested in a 40/60 portfolio. You encounter unexpected expenses that cause you to increase your initial withdrawal amount to 5%. In this 30-year median purchasing power table, your percentile would change from 65% to 17%. You are uncomfortable with having a median legacy wealth, or purchasing power, of only 17% of your original assets and therefore you increase your stock allocation to 60/40; this could result in your median purchasing power percentile more than doubling to 35%.
Or, using the same scenario: an investor withdrawing 4% annually and invested in 40/60 portfolio, you think you may live longer than 30 years and therefore may want to increase your median legacy wealth, or purchasing power, percentile. To do this you would increase your equity exposure to 60/40 thereby increasing your median legacy wealth, or purchasing power, by 22%, from 65% to 87%.
Actual results will vary and such results may be better or worse than the simulated scenarios.
1 The following allocations include short-term bonds: 60/40 is 60% stocks, 30% bonds, and 10% short-term bonds; 40/60 is 40% stocks, 40% bonds, and 20% short-term bonds; 20/80 is 20% stocks, 50% bonds, and 30% short-term bonds. The underlying long-term expected annual return assumptions (gross of fees) are 10% for stocks, 6.5% for intermediate-term, investment-grade bonds, and 4.75% for short-term bonds. The following expense ratios are then applied to arrive at net-of-fee expected returns: 1.21% for stock, 0.73% for intermediate-term, investment- grade bonds, and 0.65% for short-term bonds. These results are not predictions, but they should be viewed as reasonable estimates. See Monte Carlo disclosure page for more information. Source: T. Rowe Price Associates, Inc.
For Financial Professional Use Only – Not For Use With The Public

13. The Value of Legacy Wealth Planning
Illustrates the impact of being too conservative in retirement planning
Helps plan for higher than expected expenses in retirement
Prepares for legacy planning by using the tables to show how one might have more assets for gifts to children, grandchildren, or charity
You can use these tables to:
Illustrate the danger of not having enough exposure to stocks in retirement
Plan for higher than expected expenses in retirement by using the tables to select the optimal risk tolerance and return potential
Prepare for legacy planning if you want to gift to heirs or charities.
For Financial Professional Use Only – Not For Use With The Public

14. Disclosure
Provided courtesy of Pruco Life Insurance Company (in New York, Pruco Life Insurance company of New Jersey) both located in Newark, NJ, or by Prudential Annuities Life Assurance Corporation, Shelton, CT, as well as Prudential Annuities Distributors, Inc., Shelton, CT. All are Prudential Financial companies. The views expressed are those of T. Rowe Price. They are subject to change at any time. These views do not necessarily reflect the view of the Prudential Financial companies.
T. Rowe Price is not affiliated with any of the Prudential Financial companies.
IFS-A Ed. 1/2008
For Financial Professional Use Only – Not For Use With The Public