Item 1. Report to
Shareholders
Retirement 2005 Fund
|
November
30, 2012
|
The views and opinions in this report
were current as of November 30, 2012. They are not guarantees of performance or
investment results and should not be taken as investment advice. Investment
decisions reflect a variety of factors, and the managers reserve the right to
change their views about individual stocks, sectors, and the markets at any
time. As a result, the views expressed should not be relied upon as a forecast
of the funds future investment intent. The report is certified under the
Sarbanes-Oxley Act, which requires mutual funds and other public companies to
affirm that, to the best of their knowledge, the information in their financial
reports is fairly and accurately stated in all material respects.
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Managers Letter
Fellow Shareholders
Major U.S. stock indexes produced
solid results in the six-month period ended November 30, 2012, despite the
ongoing European sovereign debt crisis, Chinas economic slowdown, and
decelerating U.S. corporate earnings growth. Non-U.S. equity markets
outperformed U.S. shares, led by markets in the developed world. Domestic bonds
produced moderate gains, led by higher-risk issues, as fixed income investors
continued seeking attractive yields in a low interest rate environment. Emerging
markets debt rose by double digits, while non-U.S. developed markets bonds
posted more modest gains. The Retirement Funds generated strong overall gains
for the period that were in line with or exceeded the performance of their main
benchmarks.
BENCHMARK
COMPOSITION
In order to benchmark the performance
of the Retirement Funds most effectively, we have designed a combined index
portfolio specifically for each fund (shown in the Performance Comparison tables
on the following pages). This custom benchmark is composed of multiple indexes
representing the underlying asset classes in which the funds invest. As
broad-weighted benchmarks, the weights of various asset classes in the combined
index portfolios are intended to match the predetermined neutral weights given
each funds location on the funds investment glide path. As a result, they
provide a relative performance comparison for each of the Retirement Funds.
Tactical changes to the target allocations between equities and fixed income are
not incorporated into the combined index benchmarks. The equity allocation of
each Retirement Fund is compared with a blend of the Russell 3000 Index, which
measures the performance of 3,000 U.S. companies across all market
capitalizations, and the MSCI All Country World Index ex USA, an unmanaged index
that measures equity market performance of developed and emerging countries
outside the United States. The fixed income
allocation of each Retirement Fund is measured against the Barclays U.S.
Aggregate Bond Index, while our inflation-focused bond allocation is measured
against the Barclays U.S. 15 Year Treasury Inflation Protected Securities
(TIPS) Index.
The Performance Comparison tables
also show the average returns for each funds respective Lipper target-date
category, providing a tool to measure the performance of our funds against those
with similar objectives. The S&P Target Date Index series replaced the
Dow Jones Target Date Indices effective November 1, 2012. (Please see the
accompanying sidebar for important information concerning this change.) We show
both the S&P indexes and the Dow Jones indices in the Growth of $10,000
graphs following this letter. However, we continue to believe that our combined
index portfolios provide a better comparison because their asset class and
sector weightings more accurately match those of our funds.
MARKET ENVIRONMENT
Accommodative actions by central
banks around the world lifted investor sentiment during the period. In the U.S.,
the Federal Reserve kept the fed funds target rate in its 0.00% to 0.25% range
and
projected that short-term rates will
remain low at least until mid-2015. The Fed extended its Maturity Extension
Program through the end of the year and initiated a third round of quantitative
easing (commonly known as QE3) through the purchase of $40 billion of agency
mortgage-backed securities (MBS) each month. Significantly, the Fed set no
expiration date on its buying program,
but
indicated that it would continue making asset purchases as long as the outlook
for the labor market does not improve substantially. (Shortly after the end of
our reporting period, the Fed announced further Treasury bond purchases and set
a specific target for the unemployment rate, 6.5%, for the end of its MBS
purchase program.)
European Central Bank President Mario
Draghi pledged to do whatever it takes to preserve the euro and followed up
with a plan to purchase short-term sovereign debt of financially troubled
eurozone countries that agree to enter formal assistance programs and institute
economic reforms. The Bank of Japan moved to expand its own asset purchase
program in its continuing effort to fight deflation. The period ended with
significant uncertainty about U.S. fiscal policy, however, as the Obama
administration and congressional Republicans attempted to reach an agreement to
prevent or lessen the economic impact of the year-end fiscal cliff, a series of
tax increases and spending cuts scheduled to take effect in January 2013.
U.S. stocks produced solid gains over
the past six months. Large-cap stocks outperformed their smaller counterparts
for the period, and value shares fared better than growth across all market
capitalizations. Non-U.S. equities produced excellent results with developed and
emerging European markets among the best performers. Investors
were encouraged by European efforts to stabilize the debt
crisis and contain rising government bond yields in peripheral eurozone
countries. Japanese shares
lagged amid
declining exports, a strong yen, and a weakening economy.
U.S. bonds produced moderate returns
over the six-month period, with the Barclays U.S. Aggregate Bond Index returning
1.99%. In the investment-grade universe, corporate and municipal bonds
performed well. Asset-backed and agency
mortgage-backed securities trailed with lesser gains. Treasuries also
lagged, as long-term yields edged higher during the period. High yield
securities strongly outperformed their higher-quality counterparts.
PORTFOLIO REVIEW AND
POSITIONING
Stocks
The funds equity allocation generated double-digit
overall gains, with positive returns in all U.S. and non-U.S. portfolios.
However, our broader stock exposure modestly lagged our designated equity
benchmarks, a combination of the Russell 3000 Index for domestic equities and
the MSCI All Country World Index ex USA for non-U.S. stocks. Security selection
produced mixed results within our underlying domestic equity funds. The Growth
Stock Fund lagged its style-specific benchmark, while the large-cap Value Fund
outpaced its benchmark. Among non-U.S. stocks, our developed and emerging
markets stock funds generally lagged their underlying benchmarks. The Real
Assets Fund produced positive results that were in line with its benchmark, but
the asset class underperformed the broader equity markets.
We modestly reduced the size of our
overweight to stocks versus bonds during the reporting period. Stocks remain
reasonably valued and still appear attractive relative to historical valuations,
while the current low-yield environment is less favorable for bond returns. Recent monetary easing from central
banks around the world has helped to reduce some of the downside risk, but the
uncertainty of U.S. fiscal policy and austerity measures in Europe are
constraining upside potential. U.S. corporate balance sheets and profit margins
still appear healthy, buoyed by cautious hiring and capital expenditure trends.
However, a slowing global economy may weigh on revenue and earnings growth. U.S.
interest rates remain near historically low levels, and many bonds have negative
real yields (nominal yield minus inflation) despite modest inflation. Domestic
stocks currently offer dividend yields that are, in many cases, competitive with
bond yields.
We currently favor domestic growth
stocks over value stocks. A low-growth economy often benefits growth stocks more
than value as growth companies tend to rely less on a strong economy to increase
corporate earnings. A modest improvement in global
economic growth is unlikely to provide a sufficient catalyst for value
stocks to outperform. Valuations currently favor large-cap stocks over
small-caps as the latters solid performance in recent years has reinforced the
rich pricing in the small-cap universe.
U.S. economic growth prospects appear
better than those of overseas developed markets, but we remain neutral between
the two as the weaker growth has been priced into current international stock
valuations. Valuations for stocks from developed markets outside the U.S.
reflect challenging fundamentals, including a
weakening European economy. However, this is balanced by expectations for
higher growth in emerging markets. We are overweight emerging markets equities
relative to developed equity markets due to their better intermediate- to
long-term growth prospects. However, we trimmed the size of our overweight in
light of slowing global economic growth, which could constrain growth in
export-oriented economies over the short term. Although global growth may be
slowing, emerging economies face fewer headwinds due to debt and fiscal issues
and have more policy flexibility to respond to any economic and fiscal
challenges that may arise.
We are underweight real assets stocks
versus global equities as the prospects for muted global economic growth may
weigh on commodity prices. We expect commodities demand to remain subdued as
China shifts its growth model away from industrial production and exports to
domestic consumption. Over the long term,
however, exposure to energy and natural resources, real estate, basic
materials, equipment, utilities and infrastructure, and commodities should
expand the funds broad diversification and position them to perform well under
a variety of market conditions, including periods of rising
inflation.
Bonds
Our fixed income allocation generated good overall
returns over the past six months and outperformed the Barclays U.S. Aggregate
Bond Index. Exposure to high yield bonds, emerging markets debt, and
dollar-denominated non-U.S. bonds, which are not represented in the Barclays
benchmark, proved beneficial as these sectors outpaced the index. Security
selection in the underlying funds also boosted our overall results versus the
benchmark. The Inflation Focused Bond Fund provided positive absolute returns
but underperformed its style-specific benchmark.
We reduced the size of our overweight
allocation to high yield versus investment-grade bonds due to narrowing yield
spreads and aggressive trends in the new issue market, such as debt covenant
terms that are less favorable to bond holders. Despite this, high yield bonds
remain attractive relative to other fixed income sectors in the current
low-yield environment, particularly in light
of our expectations for gradual economic improvement. In addition, many high
yield issuers have improved their financial condition significantly since the
2008 global financial crisis, taking advantage of low interest rates to
refinance debt and extend maturities. The tendency for high yield debt to be
less sensitive to changes in interest rates is appealing given that interest
rates are generally near historical lows. We trimmed our allocation to emerging
markets debt but remain overweight versus U.S. investment-grade bonds. Slower
global growth prospects have eased inflationary concerns
in emerging markets, and the favorable fiscal positioning
of many emerging markets sovereign issuers stands in contrast to the budget and
funding challenges faced by many developed markets. We increased our exposure to
nondollar bonds due to accommodative central bank monetary policies,
particularly in Europe. However, we are still underweight relative to U.S.
investment-grade bonds. Despite easier monetary policies and persistent fiscal
deficits, we believe the U.S. dollar should continue to benefit as a defensive
currency during periods of heightened risk aversion.
PERFORMANCE
COMPARISON
RETIREMENT INCOME
FUND
The Retirement Income Fund returned
6.25% for the six months ended November 30, 2012. As shown in the Performance
Comparison table, the fund outpaced its Combined Index Portfolio and its Lipper
peer group average for the period. Returns for the funds Advisor and R Class
shares were slightly lower, reflecting the different fee structures for these
share classes.
Allocations to sectors not included
in the funds broad fixed income benchmark (the Barclays U.S. Aggregate Bond
Index) were positive overall for the six-month period. Exposure to emerging
markets
bonds, non-U.S.
dollar-denominated bonds, and high yield bonds was particularly beneficial.
Tactical decisions to overweight and underweight specific asset classes and the
underlying funds relative to their style-specific benchmarks also boosted
performance, led by a focus on equities over fixed income. An underweight
allocation to investment-grade bonds in favor of high yield and emerging markets
bonds also aided relative performance. Security selection in the underlying
funds produced mixed
results, with the New
Income Fund boosting performance and the International Growth & Income Fund
detracting. Our portfolio of real assets stocks provided solid absolute returns,
but it weighed modestly on relative results as the sector generally
underperformed the broader equity markets. Please see the Portfolio Review and
Positioning section for more information.
As of November 30, 2012, the funds
assets were invested in T. Rowe Price mutual funds according to the target and
actual allocations shown on page 25. At the end of our reporting period, the
target allocations were 58.0% for bond and short-term fixed income funds and
42.0% for stock funds versus 57.5% and 42.5%, respectively, on May 31, 2012. The
actual allocations may differ from the target allocations due to time horizon,
market conditions, trading environment, and other factors.
RETIREMENT 2005
FUND
The Retirement 2005 Fund gained 7.04%
for the six months ended November 30, 2012. As shown in the Performance
Comparison table, the fund outpaced its Combined Index Portfolio and its Lipper
peer group average for the period. Returns for the funds Advisor and R Class
shares were slightly lower, reflecting the different fee structures for these
share classes.
Allocations to sectors not included
in the funds broad fixed income benchmark (the Barclays U.S. Aggregate Bond
Index) were positive overall for the six-month period. Exposure to emerging
markets bonds, non-U.S. dollar-denominated bonds, and high yield bonds was
particularly beneficial. Tactical decisions
to overweight and underweight specific asset classes and the underlying funds
relative to their style-specific benchmarks also boosted performance, led by a
focus on equities over fixed income. An underweight allocation to
investment-grade bonds in favor of high yield and
emerging markets bonds also aided relative performance. Security
selection in the underlying funds produced mixed results, with the New Income
Fund boosting performance and the International Growth & Income Fund
detracting. Our portfolio of real assets stocks provided solid absolute returns,
but it weighed modestly on relative results as the sector generally
underperformed the broader equity markets. Please see the Portfolio Review and
Positioning section for more information.
As of November 30, 2012, the funds
assets were invested in T. Rowe Price mutual funds according to the target and
actual allocations shown on page 26. At the end of the period, the target
allocations were 55.0% for bond and short-term fixed income funds and 45.0% for
stock funds versus 54.0% and 46.0%, respectively, on May 31, 2012. The actual
allocations may differ from the target allocations due to time horizon, market
conditions, trading environment, and other factors.
RETIREMENT 2010
FUND
The Retirement 2010 Fund gained 7.74%
for the six months ended November 30, 2012. As shown in the Performance
Comparison table, the fund outpaced its Combined Index Portfolio and its Lipper
peer group average for the period. Returns for the funds Advisor and R Class
shares were slightly lower, reflecting the different fee structures for these
share classes.
Allocations to sectors not included in the funds broad fixed income benchmark
(the Barclays U.S. Aggregate Bond Index) were positive overall for the six-month period. Exposure to emerging markets
bonds, non-U.S. dollar-denominated bonds, and high yield bonds was particularly beneficial. Tactical decisions to overweight
and under
weight specific asset classes and the underlying funds relative to their
style-specific benchmarks also boosted performance, led by a focus on equities over fixed income. An underweight allocation
to investment-grade bonds in favor of high yield and emerging markets bonds also aided relative performance. Security
selection
in the underlying funds produced mixed results, with the New Income Fund boosting
performance and the International Growth & Income Fund detracting. Our portfolio of real assets stocks provided solid
absolute returns, but it weighed modestly on relative results as the sector generally underperformed the broader equity
markets. Please see the Portfolio Review and Positioning section for more information.
As of November 30, 2012, the funds
assets were invested in T. Rowe Price mutual funds according to the target and
actual allocations shown on page 27. At the end of the period, the target
allocations were 47.5% for bond and short-term fixed income funds and 52.5% for
stock funds versus 46.0% and 54.0%, respectively, on May 31, 2012. The actual
allocations may differ from the target allocations due to time horizon, market
conditions, trading environment, and other factors.
RETIREMENT 2015
FUND
The Retirement 2015 Fund gained 8.51%
for the six months ended November 30, 2012. As shown in the Performance
Comparison table, the fund modestly outpaced its Combined Index Portfolio for
the period and outperformed its Lipper peer group average by a wider margin.
Returns for the funds Advisor and R Class shares were slightly lower,
reflecting the different fee structures for these share classes.
Allocations to sectors not included
in the funds broad fixed income benchmark (the Barclays U.S. Aggregate Bond
Index) were positive overall for the six-month period. Exposure to emerging
markets
bonds, non-U.S. dollar-denominated
bonds, and high yield bonds was particularly beneficial. Tactical decisions to
overweight and underweight specific asset classes and the underlying funds
relative to their style-specific benchmarks also boosted performance, led by a
focus on equities over fixed income.
An
underweight allocation to investment-grade bonds in favor of high yield and
emerging markets bonds also aided relative results. Our portfolio of real assets
stocks provided solid absolute returns, but it weighed modestly on relative
results as the sector generally underperformed the broader equity markets.
Security selection in the underlying funds also detracted from results. Positive
impacts from
the Value Fund and New Income
Fund were not enough to offset underperformance in some of our non-U.S. equity
funds. Please see the Portfolio Review and Positioning section for more
information.
As of November 30, 2012, the funds
assets were invested in T. Rowe Price mutual funds according to the target and
actual allocations shown on page 28. At the end of the period, the target
allocations were 37.5% for bond and short-term mutual funds and 62.5% for stock
funds versus 36.0% and 64.0%, respectively, on May 31, 2012. The actual
allocations may differ from the target allocations due to time horizon, market
conditions, trading environment, and other factors.
RETIREMENT 2020
FUND
The Retirement 2020 Fund gained 9.09%
for the six months ended November 30, 2012. As shown in the Performance
Comparison table, the fund modestly outpaced its Combined Index Portfolio for
the period and outperformed its Lipper peer group average by a wider margin.
Returns for the funds Advisor and R Class shares were slightly lower,
reflecting the different fee structures for these share classes.
Allocations to sectors not included
in the funds broad fixed income benchmark (the Barclays U.S. Aggregate Bond
Index) were positive overall for the six-month period. Exposure to emerging
markets bonds, non-U.S. dollar-denominated bonds, and high yield bonds was
particularly beneficial. Tactical decisions to overweight and underweight
specific asset classes and the underlying funds relative to their style-specific
benchmarks also boosted performance, led by a focus on equities over fixed
income. An underweight allocation to investment-grade bonds in favor of high
yield and emerging markets bonds also aided relative results. Our portfolio of
real assets stocks provided solid absolute returns, but it weighed modestly on
relative results as the sector generally
underperformed the broader equity markets. Security selection in the underlying
funds also detracted from results. Positive impacts from the Value Fund and New
Income Fund were not enough to offset
underperformance in some of our non-U.S. equity funds. Please see the Portfolio
Review and Positioning section for more information.
As of November 30, 2012, the funds
assets were invested in T. Rowe Price mutual funds according to the target and
actual allocations shown on
page 29. At the
end of the period, the target allocations were 29.5% for bond mutual funds and
70.5% for stock funds versus 28.0% and 72.0%, respectively, on May 31, 2012. The
actual allocations may differ from the target allocations due to time horizon,
market conditions, trading environment, and other factors.
RETIREMENT 2025
FUND
The Retirement 2025 Fund gained 9.73%
for the six months ended November 30, 2012. As shown in the Performance
Comparison table, the fund modestly outpaced its Combined Index Portfolio for
the period and outperformed its Lipper peer group average by a wider margin.
Returns for the funds Advisor and R Class shares were slightly lower,
reflecting the different fee structures for these share classes.
Allocations to sectors not included
in the funds broad fixed income benchmark (the Barclays U.S. Aggregate Bond
Index) were positive overall for the six-month period. Exposure to emerging
markets bonds, non-U.S. dollar-denominated bonds, and high yield bonds was
particularly beneficial.
Tactical decisions
to overweight and underweight specific asset classes and the underlying funds
relative to their style-specific benchmarks also boosted performance, led by a
focus on equities over fixed income. An underweight allocation to
investment-grade bonds in favor of high yield and emerging markets bonds also
aided relative results. Our portfolio of real assets stocks provided solid
absolute returns, but it weighed modestly on relative results as the sector
generally underperformed the broader equity markets. Security selection in the
underlying funds also detracted from results. Positive impacts from the Value
Fund and New Income Fund were not enough to offset underperformance in some of
our non-U.S. equity funds. Please see the Portfolio Review and Positioning
section for more information.
As of November 30, 2012, the funds
assets were invested in T. Rowe Price mutual funds according to the target and
actual allocations shown on page 30. At the end of the period, the target
allocations were 21.5% for bond and short-term fixed income mutual funds and
78.5% for stock funds versus 20.5% and 79.5%, respectively, on May 31, 2012. The
actual allocations may differ from the target allocations due to time horizon,
market conditions, trading environment, and other factors.
RETIREMENT 2030
FUND
The Retirement 2030 Fund gained
10.16% for the six months ended November 30, 2012. As shown in the Performance
Comparison table, the fund modestly outpaced its Combined Index Portfolio for
the period and outperformed its Lipper peer group average by a wider margin.
Returns for the funds Advisor and R Class shares were slightly lower,
reflecting the different fee structures for these share classes.
Allocations to sectors not included
in the funds broad fixed income benchmark (the Barclays U.S. Aggregate Bond
Index) were positive overall for the six-month period. Exposure to emerging
markets
bonds, non-U.S. dollar-denominated
bonds, and high yield bonds was particularly beneficial. Tactical decisions to
overweight and underweight specific asset classes and the
underlying
funds relative to their style-specific benchmarks also
boosted performance, led by a focus on equities over fixed income. An
underweight allocation to
investment-grade
bonds in favor of high yield and emerging markets bonds also aided relative
results. Our portfolio of real assets stocks provided solid absolute returns,
but it weighed modestly on relative results as the sector generally
underperformed the broader equity markets. Security selection in the underlying
funds also detracted from results. Positive impacts from the Value Fund and New
Income Fund were not enough to offset underperformance in some of our non-U.S.
equity funds. Please see the Portfolio Review and Positioning section for more
information.
As of November 30, 2012, the funds
assets were invested in T. Rowe Price mutual funds according to the target and
actual allocations shown on page 31. At the end of the period, the target
allocations were 15.5% for bond mutual funds and 84.5% for stock funds versus
14.5% and 85.5%, respectively, on May 31, 2012. The actual allocations may
differ from the target allocations due to time horizon, market conditions,
trading environment, and other factors.
RETIREMENT 2035
FUND
The Retirement 2035 Fund gained
10.46% for the six months ended November 30, 2012. As shown in the Performance
Comparison table, the fund performed roughly in line with its Combined Index
Portfolio for the period and modestly outpaced its Lipper peer group average.
Returns for the funds Advisor and R Class shares were slightly lower,
reflecting the different fee structures for these share classes.
Allocations to sectors not included
in the funds broad fixed income benchmark (the Barclays U.S. Aggregate Bond
Index) were positive overall for the six-month period. Exposure to emerging
markets bonds, non-U.S. dollar-
denominated
bonds, and high yield bonds was particularly beneficial. Tactical decisions to
overweight and underweight specific asset classes and the underlying funds
relative to their style-specific benchmarks also boosted performance, led by a
focus on equities over fixed income. Our portfolio of real assets
stocks provided solid absolute returns, but it weighed
modestly on relative results as the sector generally underperformed the broader
equity markets. Security selection in the underlying funds also detracted from
results. Positive impacts from the Value Fund and Mid-Cap Value Fund were not
enough to offset underperformance in some of our non-U.S. developed markets
equity funds. Please see the Portfolio Review and Positioning section for more
information.
As of November 30, 2012, the funds
assets were invested in T. Rowe Price mutual funds according to the target and
actual allocations shown on page 32. At the end of the period, the target
allocations were 10.5% for bond mutual funds and 89.5% for stock funds versus
9.5% and 90.5%, respectively, on May 31, 2012. The actual allocations may differ
from the target allocations due to time horizon, market conditions, trading
environment, and other factors.
RETIREMENT 2040 FUND
RETIREMENT
2045 FUND
RETIREMENT 2050 FUND
RETIREMENT 2055 FUND
-
Retirement 2040
Fund:
The Retirement 2040 Fund
gained 10.60% for the six months ended November 30, 2012. As shown in the
Performance Comparison table, the fund performed roughly in line with its
Combined Index Portfolio for the period and modestly outpaced its Lipper peer
group average. Returns for the funds Advisor and R Class shares were slightly
lower, reflecting the different fee structures for these share
classes.
-
Retirement 2045 Fund:
The Retirement 2045 Fund gained 10.62% for the six
months ended November 30, 2012. As shown in the Performance Comparison table,
the fund performed roughly in line with its Combined Index Portfolio for the
period and modestly outpaced its Lipper peer group average. Returns for the
funds Advisor and R Class shares were slightly lower, reflecting the
different fee structures for these share classes.
-
Retirement 2050 Fund:
The Retirement 2050 Fund gained 10.59% for the six
months ended November 30, 2012. As shown in the Performance Comparison table,
the fund performed roughly in line with its Combined Index Portfolio for the
period and modestly outpaced its Lipper peer group average. Returns for the
funds Advisor and R Class shares were slightly lower, reflecting the
different fee structures for these share classes.
-
Retirement 2055 Fund:
The Retirement 2055 Fund gained 10.61% for the six
months ended November 30, 2012. As shown in the Performance
Comparison table, the fund performed roughly in line
with its Combined Index Portfolio for the period and modestly outpaced its
Lipper peer group average. Returns for the funds Advisor and R Class shares
were slightly lower, reflecting the different fee structures for these share
classes.
Allocations to sectors not included
in the funds broad fixed income benchmark (the Barclays U.S. Aggregate Bond
Index) were positive overall for the six-month period. Exposure to emerging
markets bonds, non-U.S. dollar-denominated bonds, and high yield bonds was
particularly beneficial. Tactical decisions to overweight and underweight
specific asset classes and the underlying funds relative to their style-specific
benchmarks also boosted performance, led by a focus on
equities over fixed income. Our portfolio of real assets
stocks provided solid absolute returns, but it weighed modestly on relative
results as the sector generally underperformed the broader equity markets.
Security selection in the underlying funds also detracted from results. Positive
impacts from the Value Fund and Mid-Cap Value Fund were not enough to offset
underperformance in some of our non-U.S. developed markets equity funds. Please
see the Portfolio Review and Positioning section for more
information.
As of November 30, 2012, the funds
assets were invested in T. Rowe Price mutual funds according to the target and
actual allocations shown on pages 3336. At the end of the reporting period, the
funds target allocations were 8.0% bond mutual funds and 92.0% stock funds
versus 7.5% and 92.5%, respectively, on May 31, 2012. The actual allocations may
differ from the target allocations due to time horizon, market conditions,
trading environment, and other factors.
OUTLOOK
We expect moderate economic
improvement in most of the worlds major markets, though significant risks
remain. U.S. growth expectations remain modest amid weak capital spending and
labor market conditions, hindered by uncertainty about the federal governments
fiscal cliff, including the expiration of the Bush-era tax cuts and looming
reductions in government spending. Outside the U.S., much of Europe is mired in
recession, and the potential for weaker growth in key emerging markets such as
China, Brazil, and India may lead to renewed caution on the part of
investors.
There are reasons for optimism,
however. U.S. economic data are showing incremental improvements in employment,
housing, and retail spending. Corporate balance sheets and earnings remain
strong even as earnings growth decelerates. Against a backdrop of diminishing
productivity gains, companies may increase employment and investment to meet
incrementally rising demand, while the potential for lower energy prices should
provide further support. Equity valuations are attractive relative to historical
levels, and stocks offer dividend yields that, in many cases, are competitive
with bond yields. European policymakers appear to have stabilized the
Continents debt crisis. Although a cure remains elusive as we await substantive
progress on the long-term fiscal problems plaguing many European countries, the
danger of a disorderly breakup of the eurozone has
receded substantially. Although economic growth in emerging markets
appears to be slowing, it remains robust. We believe that the worst of Chinas
economic slowdown has passed, and we are starting to see better numbers as the
country charts a path toward more sustainable growth rates.
Market volatility is likely to remain
high in the face of these ongoing economic and political uncertainties in the
U.S. and abroad. While no investment can be protected from every scenario, we
believe that a highly diversified portfolio with underlying investments based
upon strong fundamental research improves our opportunity for success over
time.
Respectfully
submitted,
Jerome A. Clark
Portfolio manager and chairman of the funds
Investment
Advisory Committee
December 20, 2012
R
ISKS OF INVESTING
The Retirement Funds investment in
many underlying funds means that they will be exposed to the risks of different
areas of the market. As with all stock and bond mutual funds, each funds share
price can fall because of weakness in the stock or bond markets, a particular
industry, or specific holdings. Stock markets can decline for many reasons,
including adverse political or economic developments, changes in investor
psychology, or heavy institutional selling. The prospects for an industry or
company may deteriorate because of a variety of factors, including disappointing
earnings or changes in the competitive environment. In addition, the investment
managers assessment of companies held in a fund may prove incorrect, resulting
in losses or poor performance even in rising markets. Investors should note that
the higher a funds allocation to stocks, the greater the risk.
Bonds are subject to interest rate
risk, the decline in bond prices that usually accompanies a rise in interest
rates, and credit risk, the chance that any fund holding could have its credit
rating downgraded or that a bond issuer will default (fail to make timely
payments of interest or principal), potentially reducing the funds income level
and share price. High yield corporate bonds could have greater price declines
than funds that invest primarily in high-quality bonds. Companies issuing high
yield bonds are not as strong financially as those with higher credit ratings,
so the bonds are usually considered speculative investments.
Funds that invest overseas may carry
more risk than funds that invest strictly in U.S. assets. Risks can result from
varying stages of economic and political development; differing regulatory
environments, trading days, and accounting standards; and higher transaction
costs of non-U.S. markets. Non-U.S. investments are also subject to currency
risk, or a decline in the value of a foreign currency versus the U.S. dollar,
which reduces the dollar value of securities denominated in that
currency.
G
LOSSARY
Barclays U.S. Aggregate Bond
Index:
An unmanaged index that tracks
domestic investment-grade bonds, including corporate, government, and
mortgage-backed securities.
Barclays 13 Year U.S.
Government/Credit Bond Index:
An
unmanaged index that tracks short-term debt instruments.
Barclays U.S. 15 Year Treasury
Inflation Protected Securities (TIPS) Index:
An unmanaged index composed of U.S. Treasury inflation protected
securities with maturities between one year and five years.
Combined Index
Portfolios:
Unmanaged blended index
portfolios created as custom benchmarks for each of the Retirement Funds. As of
November 30, 2012, the Combined Index Portfolios were composed of the following
indexes:
-
Retirement Income
Fund:
28.00% Russell 3000 Index, 30.00%
Barclays U.S. Aggregate Bond Index, 30.00% Barclays U.S. 15 Year Treasury
Inflation Protected Securities (TIPS) Index, and 12.00% MSCI All Country World
Index ex USA.
-
Retirement 2005 Fund:
30.10%
Russell 3000 Index, 41.00% Barclays U.S. Aggregate Bond Index, 16.00% Barclays
U.S. 15 Year Treasury Inflation Protected Securities (TIPS) Index, and 12.90%
MSCI All Country World Index ex USA.
-
Retirement 2010 Fund:
35.35% Russell 3000 Index, 37.00% Barclays U.S.
Aggregate Bond Index, 12.50% Barclays U.S. 15 Year Treasury Inflation
Protected Securities (TIPS) Index, and 15.15% MSCI All Country World Index ex
USA.
-
Retirement 2015 Fund:
42.35% Russell 3000 Index, 32.00% Barclays U.S.
Aggregate Bond Index, 7.50% Barclays U.S. 15 Year Treasury Inflation
Protected Securities (TIPS) Index, and 18.15% MSCI All Country World Index ex
USA.
-
Retirement 2020 Fund:
47.95% Russell 3000 Index, 27.50% Barclays U.S.
Aggregate Bond Index, 4.00% Barclays U.S. 15 Year Treasury Inflation
Protected Securities (TIPS) Index, and 20.55% MSCI All Country World Index ex
USA.
-
Retirement 2025 Fund:
53.55% Russell 3000 Index, 22.00% Barclays U.S.
Aggregate Bond Index, 1.50% Barclays U.S. 15 Year Treasury Inflation
Protected Securities (TIPS) Index, and 22.95% MSCI All Country World Index ex
USA.
-
Retirement 2030 Fund:
57.75% Russell 3000 Index, 17.50% Barclays U.S.
Aggregate Bond Index, and 24.75% MSCI All Country World Index ex
USA.
-
Retirement 2035 Fund:
61.25% Russell 3000 Index, 12.50% Barclays U.S.
Aggregate Bond Index, and 26.25% MSCI All Country World Index ex
USA.
-
Retirement 2040, 2045, 2050, and 2055
Funds:
63.00% Russell 3000 Index,
10.00% Barclays U.S. Aggregate Bond Index, and 27.00% MSCI All Country World
Index ex USA.
Credit Suisse High Yield
Index:
An unmanaged index designed to
track the U.S. dollar-denominated high yield bond market.
Dow Jones Moderately Conservative
Portfolio Index:
An unmanaged index
composed of an underlying blend of U.S. and non-U.S. stock, bond, and cash
indexes. It is designed to capture 40% of the risk and return of the Dow Jones
Aggressive Portfolio Index, an all-stock index.
Dow Jones Target-Date Portfolio
Indexes:
A series of unmanaged indexes
composed of different allocations of stocks, bonds, and short-term investments
that reflect reductions in potential risk over time.
Lipper averages:
The averages of available mutual fund performance
returns for specified time periods in categories defined by Lipper
Inc.
MSCI All Country World Index ex
USA:
An unmanaged index that measures
equity market performance of developed and emerging countries, excluding the
United States.
MSCI Emerging Markets
Index:
A capitalization-weighted index
of stocks from 26 emerging market countries that only includes securities that
may be traded by foreign investors.
Russell 1000
Index:
An index that tracks the
performance of the 1,000 largest companies in the Russell 3000 Index.
Russell 2000
Index:
An unmanaged index that tracks
the stocks of 2,000 small U.S. companies.
Russell 3000 Index:
An index that tracks the performance of
the 3,000 largest U.S. companies, representing approximately 98% of the
investable U.S. equity market.
S&P
Target Date Index series:
A series of
unmanaged indexes composed of different allocations to stocks, bonds, and
short-term investments that reflect reductions in potential risk over
time.
S&P 500 Index:
An unmanaged index that tracks the stocks of 500
primarily large-cap U.S. companies.
Performance and Expenses
This chart shows the value of a
hypothetical $10,000 investment in the fund over the past 10 fiscal year periods
or since inception (for funds lacking 10-year records). The result is compared
with benchmarks, which may include a broad-based market index and a peer group
average or index. Market indexes do not include expenses, which are deducted
from fund returns as well as mutual fund averages and indexes.
This chart shows the value of a
hypothetical $10,000 investment in the fund over the past 10 fiscal year periods
or since inception (for funds lacking 10-year records). The result is compared
with benchmarks, which may include a broad-based market index and a peer group
average or index. Market indexes do not include expenses, which are deducted
from fund returns as well as mutual fund averages and indexes.
This chart shows the value of a
hypothetical $10,000 investment in the fund over the past 10 fiscal year periods
or since inception (for funds lacking 10-year records). The result is compared
with benchmarks, which may include a broad-based market index and a peer group
average or index. Market indexes do not include expenses, which are deducted
from fund returns as well as mutual fund averages and indexes.
This chart shows the value of a
hypothetical $10,000 investment in the fund over the past 10 fiscal year periods
or since inception (for funds lacking 10-year records). The result is compared
with benchmarks, which may include a broad-based market index and a peer group
average or index. Market indexes do not include expenses, which are deducted
from fund returns as well as mutual fund averages and indexes.
This chart shows the value of a
hypothetical $10,000 investment in the fund over the past 10 fiscal year periods
or since inception (for funds lacking 10-year records). The result is compared
with benchmarks, which may include a broad-based market index and a peer group
average or index. Market indexes do not include expenses, which are deducted
from fund returns as well as mutual fund averages and indexes.
This chart shows the value of a
hypothetical $10,000 investment in the fund over the past 10 fiscal year periods
or since inception (for funds lacking 10-year records). The result is compared
with benchmarks, which may include a broad-based market index and a peer group
average or index. Market indexes do not include expenses, which are deducted
from fund returns as well as mutual fund averages and indexes.
This chart shows the value of a
hypothetical $10,000 investment in the fund over the past 10 fiscal year periods
or since inception (for funds lacking 10-year records). The result is compared
with benchmarks, which may include a broad-based market index and a peer group
average or index. Market indexes do not include expenses, which are deducted
from fund returns as well as mutual fund averages and indexes.
This chart shows the value of a
hypothetical $10,000 investment in the fund over the past 10 fiscal year periods
or since inception (for funds lacking 10-year records). The result is compared
with benchmarks, which may include a broad-based market index and a peer group
average or index. Market indexes do not include expenses, which are deducted
from fund returns as well as mutual fund averages and indexes.
This chart shows the value of a
hypothetical $10,000 investment in the fund over the past 10 fiscal year periods
or since inception (for funds lacking 10-year records). The result is compared
with benchmarks, which may include a broad-based market index and a peer group
average or index. Market indexes do not include expenses, which are deducted
from fund returns as well as mutual fund averages and indexes.
This chart shows the value of a
hypothetical $10,000 investment in the fund over the past 10 fiscal year periods
or since inception (for funds lacking 10-year records). The result is compared
with benchmarks, which may include a broad-based market index and a peer group
average or index. Market indexes do not include expenses, which are deducted
from fund returns as well as mutual fund averages and indexes.
This chart shows the value of a
hypothetical $10,000 investment in the fund over the past 10 fiscal year periods
or since inception (for funds lacking 10-year records). The result is compared
with benchmarks, which may include a broad-based market index and a peer group
average or index. Market indexes do not include expenses, which are deducted
from fund returns as well as mutual fund averages and indexes.
This chart shows the value of a
hypothetical $10,000 investment in the fund over the past 10 fiscal year periods
or since inception (for funds lacking 10-year records). The result is compared
with benchmarks, which may include a broad-based market index and a peer group
average or index. Market indexes do not include expenses, which are deducted
from fund returns as well as mutual fund averages and indexes.
As a mutual fund shareholder, you may
incur two types of costs: (1) transaction costs, such as redemption fees or
sales loads, and (2) ongoing costs, including management fees, distribution and
service (12b-1) fees, and other fund expenses. The following example is intended
to help you understand your ongoing costs (in dollars) of investing in the fund
and to compare these costs with the ongoing costs of investing in other mutual
funds. The example is based on an investment of $1,000 invested at the beginning
of the most recent six-month period and held for the entire period.
Please note that the fund has three
share classes: The original share class (Investor Class) charges no distribution
and service (12b-1) fee; Advisor Class shares are offered only through
unaffiliated brokers and other financial intermediaries and charge a 0.25% 12b-1
fee; and R Class shares are available to retirement plans serviced by
intermediaries and charge a 0.50% 12b-1 fee. Each share class is presented
separately in the table.
Actual
Expenses
The first line of the
following table (Actual) provides information about actual account values and
expenses based on the funds actual returns. You may use the information on this
line, together with your account balance, to estimate the expenses that you paid
over the period. Simply divide your account value by $1,000 (for example, an
$8,600 account value divided by $1,000 = 8.6), then multiply the result by the
number on the first line under the heading Expenses Paid During Period to
estimate the expenses you paid on your account during this period.
Hypothetical Example for
Comparison Purposes
The information
on the second line of the table (Hypothetical) is based on hypothetical account
values and expenses derived from the funds actual expense ratio and an assumed
5% per year rate of return before expenses (not the funds actual return). You
may compare the ongoing costs of investing in the fund with other funds by
contrasting this 5% hypothetical example and the 5% hypothetical examples that
appear in the shareholder reports of the other funds. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period.
Note:
T. Rowe Price charges an annual account service fee of
$20, generally for accounts with less than $10,000. The fee is waived for any
investor whose T. Rowe Price mutual fund accounts total $50,000 or more;
accounts electing to receive electronic delivery of account statements,
transaction confirmations, prospectuses, and shareholder reports; or accounts of
an investor who is a T. Rowe Price Preferred Services, Personal Services, or
Enhanced Personal Services client (enrollment in these programs generally
requires T. Rowe Price assets of at least $100,000). This fee is not included in
the accompanying table. If you are subject to the fee, keep it in mind when you
are estimating the ongoing expenses of investing in the fund and when comparing
the expenses of this fund with other funds.
You should also be aware that the
expenses shown in the table highlight only your ongoing costs and do not reflect
any transaction costs, such as redemption fees or sales loads. Therefore, the
second line of the table is useful in comparing ongoing costs only and will not
help you determine the relative total costs of owning different funds. To the
extent a fund charges transaction costs, however, the total cost of owning that
fund is higher.
Unaudited
The accompanying notes are an
integral part of these financial statements.
Unaudited
The accompanying notes are an
integral part of these financial statements.
Unaudited
The accompanying notes are an
integral part of these financial statements.
Unaudited
The accompanying notes are an
integral part of these financial statements.
Unaudited
The accompanying notes are an
integral part of these financial statements.
Unaudited
The accompanying notes are an
integral part of these financial statements.
Unaudited
The accompanying notes are an
integral part of these financial statements.
Unaudited
Notes to
Financial Statements
|
T. Rowe Price Retirement Funds, Inc.
(the corporation), is registered under the Investment Company Act of 1940 (the
1940 Act). The T. Rowe Price Retirement 2005 Fund (the fund) is a
nondiversified, open-end management investment company and is one of the
portfolios established by the corporation. The fund seeks the highest total
return over time consistent with an emphasis on both capital growth and income.
The fund invests its assets in a selection of underlying T. Rowe Price mutual
funds (underlying Price funds) to achieve a diversified portfolio of stocks and
bonds. The funds asset mix becomes increasingly more conservative over time
leading up to and after the targeted retirement date.
The fund has three classes
of shares: the Retirement 2005 Fund original share class, referred to in this
report as the Investor Class, offered since February 27, 2004; Retirement 2005
FundAdvisor Class (Advisor Class), offered since May 31, 2007; and Retirement
2005 FundR Class (R Class), also offered since May 31, 2007. Advisor Class
shares are sold only through brokers and other financial intermediaries, and R
Class shares are available to retirement plans serviced by intermediaries. The
Advisor Class and R Class each operate under separate Board-approved Rule 12b-1
plans, pursuant to which each class compensates financial intermediaries for
distribution, shareholder servicing, and/or certain administrative services.
Each class has exclusive voting rights on matters related solely to that class;
separate voting rights on matters that relate to all classes; and, in all other
respects, the same rights and obligations as the other classes.
NOTE
1
-
SIGNIFICANT
ACCOUNTING
P
OLICIES
Basis
of
P
reparation
The accompanying financial statements
were prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP), which require the use of estimates made by
management. Management believes that estimates and valuations of the underlying
Price funds are appropriate; however, actual results may differ from those
estimates, and the valuations reflected in the accompanying financial statements
may differ from the value ultimately received upon sale of the underlying Price
funds.
Investment
Transactions,
Investment
Income,
and
Distributions
Income and
expenses are recorded on the accrual basis. Income and capital gain
distributions from the underlying Price funds are recorded on the ex-dividend
date. Purchases and sales of the underlying Price funds are accounted for on the
trade date. Gains and losses realized on sales of the underlying Price funds are
reported on the identified cost basis. Income tax-related interest and
penalties, if incurred, would be recorded as income tax expense. Distributions
to shareholders are recorded on the ex-dividend date. Income distributions are
declared and paid by each class annually. Capital gain distributions, if any,
generally are declared and paid by the fund annually.
Class
Accounting
The Advisor Class and R Class each pay distribution,
shareholder servicing, and/or administrative expenses in the form of Rule 12b-1
fees in an amount not exceeding 0.25% and 0.50%, respectively, of the classs
average net assets. Income distributions from the underlying Price funds and
realized and unrealized gains and losses are allocated to the classes based upon
the relative daily net assets of each class.
In
-K
ind
Redemptions
In accordance with guidelines described
in the funds prospectus, the fund may distribute shares of the underlying Price
funds rather than cash as payment for a redemption of fund shares (in-kind
redemption). For financial reporting purposes, the fund recognizes a gain on
in-kind redemptions to the extent the value of the distributed shares of the
underlying Price funds on the date of redemption exceeds the cost of those
shares. Gains and losses realized on in-kind redemptions are not recognized for
tax purposes and are reclassified from undistributed realized gain (loss) to
paid-in capital. During the six months ended November 30, 2012, the fund
realized $1,357,000 of net gain on $4,890,000 of in-kind redemptions.
NOTE
2
-
VALUATION
The funds financial instruments are
reported at fair value as defined by GAAP. The fund values its financial
instruments and computes its net asset value per share at the close of the New
York Stock Exchange (NYSE), normally 4 p.m. ET, each day that the NYSE is open
for business. Investments in the underlying Price funds are valued at their
closing net asset value per share on the day of valuation. Financial instruments
for which these valuation procedures are inappropriate or are deemed not to
reflect fair value are stated at fair value as determined in good faith by the
T. Rowe Price Valuation Committee, established by the funds Board of
Directors.
Various inputs are used to determine
the value of financial instruments. These inputs are summarized in the three
broad levels listed below:
Level 1 quoted prices in active
markets for identical financial instruments
Level 2 observable inputs other
than Level 1 quoted prices (including, but not limited to, quoted prices for
similar financial instruments, interest rates, prepayment speeds, and credit
risk)
Level 3 unobservable
inputs
Observable inputs are those based on
market data obtained from sources independent of the fund, and unobservable
inputs reflect the funds own assumptions based on the best information
available. The input levels are not necessarily an indication of the risk or
liquidity associated with financial instruments at that level. On November 30,
2012, all investments in the underlying Price funds were classified as Level 1,
based on the inputs used to determine their values.
NOTE
3
-
INVESTMENTS
IN
UNDERLYING
P
RICE
FUNDS
Purchases and sales of the underlying
Price funds during the six months ended November 30, 2012, aggregated
$131,328,000 and $104,903,000, respectively.
NOTE
4
-
FEDERAL
INCOME
TA
X
ES
No provision for federal income taxes
is required since the fund intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code and
distribute to shareholders all of its taxable income and gains. Distributions
determined in accordance with federal income tax regulations may differ in
amount or character from net investment income and realized gains for financial
reporting purposes. Financial reporting records are adjusted for permanent
book/tax differences to reflect tax character but are not adjusted for temporary
differences. The amount and character of tax-basis distributions and composition
of net assets are finalized at fiscal year-end; accordingly, tax-basis balances
have not been determined as of the date of this report.
The fund intends to retain realized
gains to the extent of available capital loss carryforwards. As a result of the
Regulated Investment Company Modernization Act of 2010, net capital losses
realized on or after June 1, 2011 (effective date) may be carried forward
indefinitely to offset future realized capital gains; however, post-effective
losses must be used before pre-effective capital loss carryforwards with
expiration dates. Accordingly, it is possible that all or a portion of the
funds pre-effective capital loss carryforwards could expire unused. As of May
31, 2012, the fund had $15,516,000 of available capital loss carryforwards,
which all expire in fiscal 2018.
At November 30, 2012, the cost of
investments for federal income tax purposes was $1,212,298,000. Net unrealized
gain aggregated $125,325,000 at period-end, of which $180,897,000 related to
appreciated investments and $55,572,000 related to depreciated investments.
NOTE
5
-
RELATED
P
ARTY
TRANSACTIONS
The fund is managed by T. Rowe Price
Associates, Inc. (Price Associates), a wholly owned subsidiary of T. Rowe Price
Group, Inc. (Price Group). Price Associates, directly or through sub-advisory
agreements with its wholly owned subsidiaries, also provides investment
management services to all the underlying Price funds. Pursuant to various
service agreements, Price Associates and its wholly owned subsidiaries provide
shareholder servicing and administrative, transfer and dividend disbursing,
accounting, marketing, and certain other services to the fund. Certain officers
and directors of the fund are also officers and directors of Price Associates
and its subsidiaries and the underlying Price funds.
The fund pays no management fees;
however, Price Associates receives management fees from the underlying Price
funds. The fund operates in accordance with the investment management and
special servicing agreements between and among the corporation; the underlying
Price funds; Price Associates; and T. Rowe Price Services, Inc., a wholly owned
subsidiary of Price Associates. Pursuant to these agreements, expenses
associated with the operation of the fund, other than class-specific Rule 12b-1
fees, are borne by each underlying Price fund to the extent of estimated
savings to it and in proportion to the average daily value of its shares owned
by the fund. Therefore, the expense ratio of each class reflects only its Rule
12b-1 fees. However, the fund indirectly bears its proportionate share of the
management fees and operating costs of the underlying Price funds in which it
invests.
The fund does not invest in the
underlying Price funds for the purpose of exercising management or control;
however, investments by the fund may represent a significant portion of an
underlying Price funds net assets. At November 30, 2012, the fund held less
than 25% of the outstanding shares of any underlying Price fund.
Information on Proxy Voting Policies, Procedures, and
Records
|
A description of the policies and
procedures used by T. Rowe Price funds and portfolios to determine how to vote
proxies relating to portfolio securities is available in each funds Statement
of Additional Information, which you may request by calling 1-800-225-5132 or by
accessing the SECs website, sec.gov. The description of our proxy voting
policies and procedures is also available on our website, troweprice.com. To
access it, click on the words Our Company at the top of our corporate
homepage. Then, when the next page appears, click on the words Proxy Voting
Policies on the left side of the page.
Each funds most recent annual proxy
voting record is available on our website and through the SECs website. To
access it through our website, follow the directions above, then click on the
words Proxy Voting Records on the right side of the Proxy Voting Policies
page.
How to
Obtain Quarterly Portfolio Holdings
|
The fund files a complete schedule of
portfolio holdings with the Securities and Exchange Commission for the first and
third quarters of each fiscal year on Form N-Q. The funds Form N-Q is available
electronically on the SECs website (sec.gov); hard copies may be reviewed and
copied at the SECs Public Reference Room, 100 F St. N.E., Washington, DC 20549.
For more information on the Public Reference Room, call 1-800-SEC-0330.