Morningstar Advisor - October/November 2013 - (Page 66)

Gray Matters Exhibit 6 Worst-Case Return by Age Average Equity Allocation Glide Path Total Glide Path (%) Probability of $0 Balance at Age Pre-Retirement (%) Post-Retirement (%) 55 (%) 65 (%) 75 (%) 85 (%) 95 (%) Industry Glide Paths All 59.7 76.6 35.2 –12.1 –9.5 –8.3 –7.5 –7.5 Through 61.3 79.1 35.2 –12.7 –10.2 –8.4 –7.3 –7.3 To 57.9 73.7 35.0 –11.4 –8.6 –7.9 –7.9 –7.9 0.614 0.808 0.335 –13.2 –10.6 –7.3 –7.3 –7.3 0.57 0.756 0.302 –12.3 –9.9 –8.2 –6.5 –6.5 0.633 0.812 0.376 –13.4 –10.8 –8.7 –7.7 –7.7 American Century 0.605 0.705 0.462 –11.2 –9.7 –9.3 –9.3 –9.3 BlackRock 0.611 0.771 0.382 –11.9 –9.2 –8.2 –8.2 –8.2 Through Glide Paths Vanguard Fidelity T. Rowe Price To Glide Paths Data as of Dec. 31, 2012 Exhibit 7 Expected Range of Savings Balances for 65-Year-Olds in Selected Series’ Glide Paths Saving Balance ($Mil) 5th Percentile 25th–50th Percentile 51st–75th Percentile 2.5 2.0 1.5 1.0 0.5 All Series To Series Data as of Dec. 31, 2012 Through Series 95th Percentile the industry’s largest target-date series with “to” glide paths. Exhibit 4 depicts each of these series’ glide paths, along with the industry average of all glide paths for comparison. The results in Exhibit 5 largely mirror the industry glide-path results: More equities generally correspond with a lower probability of outliving savings, particularly in the more advanced years. T. Rowe Price, for example, has a notably higher allocation to equities compared with Fidelity. At age 85, investors in the former have a 22.7% chance of depleting their savings, while investors in the latter have a 24.2% chance of doing so. The difference is small, but it is stable. Similar to results for the industry glide paths, the relationship widens over time. At age 95, 38.2% of T. Rowe Price target-date investors have used all of their savings, while 43% of Fidelity investors have done the same—an almost five-percentage-point difference. When that higher equity allocation occurs seems to matter, too. For example, American Century and BlackRock have similar overall equity allocations throughout the entire glide path, with both having roughly 60% average allocations to equities across their entire glide paths. However, American Century has markedly less in stocks than BlackRock in the preretirement year (70.5% versus 77.1%), and that relationship switches in the postretirement years (46.2% versus 38.2%). Both target-date series have similar outcomes when investors reach age 85, with a little less than a fourth of investors reaching a $0 balance. The higher equity allocation in retirement appears to give retirees a small but stable edge in maintaining a positive savings balance as they age; in this case, 41.9% of American Century investors have exhausted their savings by age 95, while 43.2% of BlackRock investors have done so. The table and the results also serve as a reminder that the “to” versus “through” distinction is somewhat arbitrary. While the 66 Morningstar Advisor October/November 2013

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2013

Morningstar Advisor - October/November 2013
Contents
Contributors
Letter From the Editor
How to Make Social Media Work for You
Do Mutual Funds Still Have a Role?
More Personal Than Finance
How to Handle Your TIPS Positions
A Real Estate Veteran Starts From Scratch
Investments á la Carte
Investment Briefs
When to Say No
Take a Guarded Approach to Homebuilders
Fund Distribution Has Been Turned on Its Head. Now What?
Winning the Distribution Battle
Active ETFs Wait for Their Heyday
A Fund Firm Defies Indexing Trend
Piloting New Channels
A Good Fit
The Predictive Power of Fair Value Estimates
Does Being Prudent Pay Off?
Utilizing Utilities’ Total Return
Stuck in the Middle Is Not a Bad Place to Be
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
The Good Guys Win

Morningstar Advisor - October/November 2013