Importance of Sequence of Returns Risk in Target-Date Strategies

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1 INVESTMENT VIEWPOINTS JUNE 2013 Importance of Sequence of Returns Risk in Target-Date Strategies Rich Weiss Senior Vice President Senior Portfolio Manager Asset Allocation Strategies Sequence of returns refers to the order in which an investor experiences returns. This concept is often used to illustrate the so-called flaw of averages ; that is, two investors with the same arithmetic average return can end up with significantly different account balances depending on the timing, or sequence, of those returns. The pattern of returns is particularly important for retirement investors, who are necessarily exposed to a long series of market returns, and who are especially vulnerable to poor performance in the crucial years around retirement. As a result, investment professionals talk in terms of sequence of returns risk because of the likelihood that investors who experience a run of bad performance shortly before or after retirement will deplete their assets much more quickly than would otherwise be the case. This phenomenon is sometimes also termed path dependency because investor retirement outcomes are so heavily dependent upon the path of market returns. Because of this fact, sequence of returns risk is an important concept in target-date fund (TDF) construction and management. The composition and allocation of the glide path greatly influences an investor s exposure to sequence of returns risk. Nancy Pilotte Vice President Client Portfolio Manager Though the concept is an important one, we believe that most discussions of sequence of returns risk are flawed to the extent that they often assume a single, lump-sum retirement contribution and argue that the sequence of returns are of little or no consequence in the years leading up to retirement. We would argue that a more robust discussion of sequence of returns risk, particularly in a TDF context, must take into account typical investor behavior, which includes regular, modest account contributions over a plan participant s working lifetime. What s more, these analyses should also account for such factors as an investor s life cycle and wealth levels, as well as the effect of volatility on investor behavior and cumulative returns over time.

2 Returns and Risk Pre-Retirement Naïve discussions of sequence of returns discount this risk in the periods before retirement, arguing that the pattern of returns doesn t matter in the accumulation phase, only in the withdrawal phase. Essentially, the argument goes that over a long enough time period, two return streams with the same arithmetic average return will produce the same investment result, provided the investor does not make contributions or take distributions from their account. Typically, these arguments are built around a graphic that looks much like Figure 1. Actual Reverse Constant Low to High $600,000 $500,000 Figure 1: Hypothetical Sequence of Return: What Risk? High to Low Figure 1: Typical, hypothetical presentation of sequence of returns, which argues that pre-retirement, the pattern of returns does not matter. For this to be true, however, requires a series of assumptions that are completely at odds with real-world retirement investing for example, this presentation assumes a single lump-sum investment, and is highly end-point sensitive. Note the importance of path dependency these data depict radically different investing paths and wealth levels en route to the same end point. It is fair to ask if investors subject to such volatile return streams would actually stick with their strategy and reach their retirement destination. $400,000 $300,000 $200,000 $100,000 $0 Dec-82 Dec-83 Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Source: American Century Investments. The chart depicts the growth of a single $10,000 lump-sum investment in the S&P 500 Index from 12/31/1982 to 12/31/2012. Actual refers to the actual returns of the S&P 500. Reverse depicts the annual returns of the S&P 500 in reverse chronological order. High to low depicts the returns of the S&P 500 over the 30-year period in order from highest to lowest. Low to high depicts the returns of the S&P 500 over the 30-year period in order from lowest to highest. Debunking Common Sequence of Return Arguments Let s detail the problems we see with these sorts of charts. First, these arguments assume a one-time, lump-sum contribution. In the real world, we know of virtually no scenario in which retirement investors (particularly those in corporate retirement plans) will not make regularly recurring, meaningful contributions to their accounts over their working lifetimes. Indeed, the Bureau of Labor Statistics reported in a 2010 survey that greater than 40% of private industry workers participate in a defined contribution (DC) retirement plan. And while analysis of investor behavior in DC plans shows that participation and contribution rates vary widely by age, education, and income levels, research also finds that retirement plan contributions are remarkably durable even in the face of income shocks or rising current consumption needs. As a result, we see little value in discussing sequence of returns risk assuming lump-sum contributions in a retirement investing context. 2

3 Second, the analysis presented in Figure 1 is highly end-point sensitive. In other words, these hypothetical scenarios define some span of time (usually 30 years) and present multiple return streams that conveniently end at the same account value. It is technically possible to imagine several hypothetical investors who begin and end with equal account balances after 30 years despite having taken radically different paths to get there. But real-world retirement plans aren t blessed with an overabundance of longtime-horizon, lump-sum investors who also happen to be indifferent to market volatility. Most discussions of sequence of return risk assume a perfectly rational, buy-and-hold investor; whereas all the data and experience at our command says that investors subject to volatile return streams and losses (particularly when the absolute dollar amounts are large) are liable to abandon their savings plan. Rather, if we are to talk about sequence of return risk in the context of real-life TDFs and pension plans, then we must consider these various return streams in terms of their impact on a diverse range of fund shareholders and plan participants. Investor time to retirement, account balance, and risk sensitivities will vary widely across participants in the typical retirement plan. For example, going back to Figure 1, the outcomes look very different for investors retiring 5, 10, or even 20 years into that 30-year cycle. Seen in such a light, arguments downplaying sequence of returns risk during the accumulation phase seem to us far from persuasive. In reality, investors have only one chance at retirement and there is no guarantee that the return stream investors experience will in fact revert to some sort of mean or average return during the span of an investor s accumulation phase. Sequence of Returns and Abandonment Rates Most discussions of sequence of return risk assume a perfectly rational, buy-and-hold investor, whereas all the data and experience at our command says that investors subject to volatile return streams and losses (particularly when the absolute dollar amounts are large) are liable to abandon their savings plan. Indeed, one well-known sell mistake is to react badly to market events, eliminating equity investments and moving entirely to cash, effectively abandoning their investment strategy. Studies of investor behavior refer to this as the abandonment rate, or proportion of investors that simply throw in the towel when equity market volatility becomes too great to stomach. Our own analysis of academic and industry literature suggests that investors are prone to bailing out of portfolios that have incurred one or two years of moderate to significant losses. Back to Reality Here we attempt to show the importance of the order in which an investor experiences market returns in the period prior to retirement. First let s look at historical market returns and assume regular, modest retirement account contributions over time. The result is Figure 2, which shows the impact of different return patterns over time using regular $10,000 annual contributions from 12/31/1982 to 12/31/2012. The green line shows the results an investor would have achieved in this 30-year period by investing $10,000 per year in the S&P 500 Index. The blue line shows the results an investor would have achieved with the exact same index returns experienced in reverse order. Clearly, the arithmetic average return is exactly the same in these two examples, only the return pattern has been changed. The findings are clear: The sequence of returns greatly influences an investor s financial outcomes. Investors who experience higher returns later on (when they have more wealth) end with significantly higher balances (corresponding to the blue line in Figure 2). On the other hand, investors who experience their best returns early on, when they have relatively little wealth, and then suffer lower/negative returns later 3

4 on, after they ve contributed significant amounts to their savings, show poorer results (corresponding to the green line below). Sequence of returns risk is critically related to the return pattern and how it is correlated to investor wealth levels. Figure 2: Pattern of Return Matters Greatly Actual w $10,000/Yr Reverse w $10,000/Yr Figure 2: This graphic shows just how significant an impact the pattern of market returns can have on investor account balances, even in the years before retirement. This chart depicts investment outcomes using actual and reverse chronological S&P 500 returns (and therefore having the same arithmetic average return) with regular contributions over a 30-year period. $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 Dec-82 Dec-83 Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Hypothetical illustration. Source: American Century Investments. The chart depicts the growth of $10,000 invested in the S&P 500 annually from 12/31/1982 to 12/31/2012. Actual refers to the actual returns of the S&P 500. Reverse depicts the annual returns of the S&P 500 in reverse chronological order. This information is for illustrative purposes only and is not intended to represent any particular investment product. There can be no assurance similar results can be achieved, and this information should not be relied upon as a specific recommendation to buy or sell an investment product. This illustrates a crucial concept. First, investors don t receive some hypothetical return stream over time they get only one chance to do retirement investing right, and a portion of their success or failure will be due to the return stream they experience. Second, the pattern of market returns combines with lifecycle and wealth accumulation/ distribution elements to form a potent risk cocktail for investors. These risks become more pronounced the more extreme the distribution of returns. For example, in Figure 3 we build on the data presented in Figure 2, adding three return streams in addition to actual and reverse S&P 500 returns. The blue line shows what an investor s balance would be if they experienced annual S&P 500 returns of the last 30 years in order from highest to lowest. The orange line shows the account balance at retirement with S&P 500 returns experienced in order from lowest to highest. Finally, we thought it would be instructive to show an investor s outcome using exactly the arithmetic average annual return year after year (the light green line). 4

5 Figure 3: The More Extreme the Distribution of Returns, the More Extreme the Outcomes Actual w $10,000/Yr Reverse w $10,000/Yr Constant w $10,000/Yr Low to High w $10,000/Yr High to Low w $10,000/Yr $10,000,000 $8,000,000 $6,000,000 Figure 3: This chart shows that even given the same average return, retirement outcomes can be widely divergent. Building on the data in Figure 2, this graphic also depicts annual S&P 500 returns over the last 30 years in order from lowest to highest and highest to lowest, as well as constant average annual returns. $4,000,000 $2,000,000 $0 Dec-82 Dec-83 Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Hypothetical illustration. Source: American Century Investments. The chart depicts the growth of $10,000 invested annually in the S&P 500 from 12/31/1982 to 12/31/2012. Actual refers to the actual returns of the S&P 500. Reverse depicts the annual returns of the S&P 500 in reverse chronological order. High to low depicts the returns of the S&P 500 over the 30-year period in order from highest to lowest. Low to high depicts the returns of the S&P 500 over the 30-year period in order from lowest to highest. Constant depicts the average annual return year after year. This information is for illustrative purposes only and is not intended to represent any particular investment product. There can be no assurance similar results can be achieved, and this information should not be relied upon as a specific recommendation to buy or sell an investment product. Again, in all these cases, the arithmetic average return is the exact same, only the order, or pattern, of that return stream is different. We don t show these data to represent any actual investor s experience. Rather, we include these lines to make a crucial point. We believe this chart dramatically illustrates the magnitude of sequence of return risk even in the accumulation phase, and particularly as retirement draws near. Indeed, we see that good investment results late in retirement, when account balances are typically large, can have a profound effect in dollar terms. But the opposite is also true enjoying good returns early in your retirement investing program is of comparatively little benefit because account balances are typically small, while poor performance as retirement nears can cripple an investor s retirement plans. To summarize, there is no such thing as an average investor in reality. Each of us gets one and only one chance at retirement. Everyone s unique investment path is critically dependent on their particular starting and ending points. Therefore, although equity returns may average 10% (give or take) annually over long time periods, most investors are likely to realize significantly different equity returns at or around their unique retirement date. 5

6 Sequence of Returns Risk Post-Retirement We ve seen that the sequence in which an investor experiences returns can have a profound effect on retirement outcomes. This is particularly true in the period after retirement, when retirees stop making contributions and instead begin drawing down their account balance. Market shocks in this distribution phase can deplete the portfolio much more rapidly than would otherwise be the case. To see why this is so, we compare portfolios experiencing shocks early and late in retirement in Figure 4. We assume an investor retiring at age 65 with a balance of about $900,000 earning an annual return of 5%. We used a 4% annual withdrawal rate, which we increased by 3% annually to maintain purchasing power over time. Under these assumptions, our base case scenario depletes the portfolio gradually, with the balance turning negative at age 90. But the calculus changes dramatically when we allow for a significant market shock. For example, a 15% downside shock at age 67 shortens the life of the portfolio by fully six years, depleting the balance at age 84 instead of it lasting to age 90. By comparison, the same 15% shock at age 80 has less of an impact, shortening the life of the portfolio by two years. Again, higher sensitivity to loss occurs early on in retirement because account balances are larger and the compounding effect is greater given the longer time span in retirement. $1,000,000 $800,000 Figure 4: Conservative Allocation Crucial to Managing Risk Early in Retirement Figure 4: Sequence of returns crucial in post-retirement years, when a shock early in retirement can deplete the portfolio much more quickly than would otherwise be the case. Cumulative Balance $600,000 $400,000 $200,000 $0 -$200,000 -$400,000 Base Case -$62,418 Shock at 80 -$275,599 Shock at 67 -$631,196 -$600,000 -$800, Age Hypothetical illustration. Source: American Century Investments. Base case scenario assumptions: assumes annual assets return of 5%, first year withdrawal of 4% of capital, increased by 3% annually. Shock: a single-year -15% event. This information is for illustrative purposes only and is not intended to represent any particular investment product. There can be no assurance similar results can be achieved, and this information should not be relied upon as a specific recommendation to buy or sell an investment product. Sequence of Returns and TDF Glide Paths Next, we discuss how an asset allocation strategy can minimize sequence of returns risk by managing market risk (volatility) and maximizing diversification in the crucial years around retirement. To do that, we show an example of how a portfolio with a basic glide path and asset allocation can help minimize the impact of market volatility. First, we take the actual S&P 500 return stream presented earlier in Figure 2. Then we contrast that 6

7 with the performance of a portfolio that gradually adds bonds (using the Barclays U.S. Aggregate Bond Index) and cash (as represented by the Citigroup Three-Month T-Bill Index) to the equity allocation. The result is presented in Figure 5. $1,800,000 Figure 5: Glide Path Smooths Return Pattern and Reduces Sequence of Return Risk S&P 500 Hypothetical Glide Path Figure 5: A portfolio with a gradually increasing allocation to bonds (a relatively gently sloping glide path) helps minimize the impact of a poor sequence of returns in the crucial years leading up to retirement. $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 $1,587,352 $1,533,891 Dec-82 Dec-83 Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Hypothetical illustration. Source: American Century Investments. The green line depicts the growth of $10,000 invested annually in the S&P 500 from 12/31/1982 to 12/31/2012. The blue line depicts the growth of $10,000 invested annually in a model diversified portfolio from 12/31/1982 to 12/31/2012. The composition and allocation of the diversified portfolio changes gradually over time, reducing the equity allocation in favor of rising allocations to bonds and cash. The stock, bond, and cash components of the diversified portfolio are the S&P 500, Barclays U.S. Aggregate Bond Index, and the Citigroup Three-Month T-Bill Index. Thirty years from retirement, the diversified portfolio was 85% stocks, 15% bonds, and 0% cash. The diversified portfolio rolls down a glide path (gradually de-risking) until reaching an allocation that is approximately 53% stocks, 41% bonds, and 6% cash in the final year of our analysis. This information is for illustrative purposes only and is not intended to represent any particular investment product. There can be no assurance similar results can be achieved, and this information should not be relied upon as a specific recommendation to buy or sell an investment product. Of course, we should provide the disclaimer that past performance can t guarantee future results. Nor do we suggest this is the one glide path to rule them all. Rather, we hope to show that even a fairly unsophisticated (unmanaged, simple stocks/bonds/ cash) glide path and asset allocation strategy can significantly reduce the risk to plan participants from a poor sequence of returns, particularly as retirement nears. Consider the dollar values involved: How would the typical investor react in the period from , when the equity-only portfolio declined from more than $1.1 million to about $700,000, a loss of more than a third of the portfolio s total value representing many years of retirement income? Or from $1.4 million to $900,000 from 2007 to 2008 (a loss of 36%)? By comparison, the diversified portfolio went from about $860,000 to $733,000 in the former case (a loss of 15%) and from $1.2 to about $1.0 million in the latter (a loss of 18%). Our intuition and increasing amounts of evidence suggest that the smoother ride to a similar result improves the likelihood that an investor will stay on the path for the entire ride. 7

8 TDFs with to retirement glide paths reach their most conservative asset allocation at the funds target date, and remain fixed thereafter. It s important to point out that to TDFs are meant to be held beyond the retirement date and meet investor income needs throughout the post-retirement period. In contrast, through retirement TDFs do not reach their most conservative allocation until after the target date. To Retirement Through Retirement Figure 6: The crucial difference in to versus through glide paths is degree of equity exposure around the target date, which has important implications for volatility and sequence of return risk as retirement draws near. Implications for TDF Glide Paths In a TDF context, sequence of return risk has important implications for the composition and allocation of the glide path over time. Here we hope to address key questions about how to evaluate various glide paths and assess best fit for a given set of plan participants. Of course, this is a highly complex topic, and there is no single broadly accepted methodology for evaluating competing glide paths. (Readers interested in a detailed discussion of the important topic of risk assessment in target-date products should see our 2012 paper TDR: A New, Comprehensive Measure of Target-Date Risk.) Nevertheless, it is possible to identify key glide path differentiators, including equity exposure in and around the retirement date, the number and relationship of asset classes making up the portfolio, and the slope of the glide path over time. To Glide Path Preferable to Through With respect to the structure of the glide path, the key consideration is, does the equity allocation reach its most conservative point at the target date (known as a to retirement glide path), or later in retirement (a through retirement glide path)? A good example of contrasting to and through retirement glide paths can be seen in Figure 6 below (see the sidebar for additional definition of to versus through glide paths). Equity Allocation 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: American Century Investments. Figure 6: Typical Contrasting Glide Paths of To and Through Portfolios Over Time Years (Pre)/Post-Retirement We ve written extensively about the relative merits of to versus through retirement glide paths, most notably in Revisiting the To vs. Through Debate: Our Approach to the Target-Date Glide Path (2013) and What Do Five Years of History Teach Us about the Future? (2009). For the purposes of this paper, we can summarize our proprietary work on the construction of the One Choice SM Target Date Portfolios glide path, as well as recent academic and analytical studies on this topic. Our analysis and mounting thirdparty research indicate that better outcomes for retirees in target-date portfolios are achieved when the portfolio reaches its most conservative asset allocation at retirement, as opposed to entering retirement with a riskier allocation and gradually decreasing equity exposure throughout the withdrawal phase. 8

9 So if what we are concerned about is the sequence of returns (particularly around the retirement date), what we find is that to TDFs do a better job recognizing that risk exposure is highest in this period. Their greater degree of diversification in these crucial years when account balances are typically highest significantly decreases the likelihood of an investor outliving their savings. Specifically, our proprietary research found that the to glide path reduced by half the likelihood that a retiree will run out of money too soon. Similarly, a 2010 Russell Investments paper, The Date Debate, found that a flat glide path in retirement always makes sense relative to a sloping one without regard to the level of aggressiveness. With respect to market risk, TDFs with to glide paths are more effective at reducing overall portfolio volatility our research shows that a through glide path with the same average equity allocation as a to glide path has higher risk. Add it all up, and a to portfolio may increase the likelihood of a fully funded retirement for plan participants relative to a through retirement portfolio. Slope of Glide Path Crucial: Flatter Is Better Related to the notion of to versus through retirement glide paths is the issue of slope. It turns out that a flatter glide path is preferable to a more steeply sloped one with respect to alleviating the potentially detrimental effects of a bad string of market returns over time, other things equal. As we ve discussed, no matter how well one saves and invests, a poorly timed bear market can significantly undermine one s chances of reaching retirement saving objectives. Flatter, less-sloped glide path structures are less sensitive to path dependency and, therefore, minimize the potentially harmful, if not disastrous, effects of sequence of return risk on retirement success. To see why this is so, it is helpful to call on work from our earlier TDR paper. To summarize, TDR is a framework for evaluating risk in target-date glide paths. Crucially for our purposes, TDR assesses risk across the entire investment lifecycle, rather than at a single point in time, and is wealth weighted, to better reflect the greater risk of loss to investors approaching or just into retirement. The TDR framework allows for comparisons across multiple TDF providers (glide paths) using a consistent set of assumptions. This means we can view the effect of different glide paths on participant performance under various market return assumptions. We have done exactly that in Figure 7, applying different equity market regimes high, medium, and low risk premiums to the specified TDF providers below to come up with a risk range. Figure 7: This table demonstrates that the slope of the glide path and equity market environment have a profound effect on risk levels and rankings. Generally speaking, the wider the range, the steeper the glide path, while the narrower the range, the flatter the glide path. Figure 7: Slope of Glide Path Influences Risk Exposure TDF Provider Risk Range 1 Risk Spread American Century Investments 10.45% 11.50% 1.05% Fidelity 8.14% 12.32% 4.17% JP Morgan 8.99% 11.42% 2.43% T. Rowe Price 9.95% 13.99% 4.04% Vanguard 9.49% 13.00% 3.51% Wells Fargo 7.64% 9.86% 2.21% Source: American Century Investments. Wittman, Scott, and Rich Weiss, TDR: A New, Comprehensive Measure of Target-Date Risk (2012). 1 Ranges calculated using 10% savings rate scenario with 40% income replacement ratio and 6% withdrawal rate, across three market environments: Low, medium, and high equity risk premiums. 9

10 The risk range and resulting risk spread allow us to make some inferences about a TDF provider s glide path construction. The steeper the slope over the entire life of the glide path, the greater the variation in risk and return as our assumptions about equity environments change. In contrast, TDF providers with flatter glide paths show more stability (have a lower risk spread). In general, we believe that a lower risk spread suggests a more robust glide path and asset allocation across various economic and market scenarios. Said differently, the wider the risk range, the greater the dispersion of retirement outcomes is likely to be for the various participants in the plan. Our analysis suggests that TDFs would do well to use a relatively flat glide path and reach their most conservative allocation at the retirement date. Wrapping Up There are several conclusions that follow from this larger discussion. First, sequence of returns risk is often underestimated during the accumulation phase in the crucial years just before retirement. Second, meaningful discussions of path dependency must account for real-life investor behaviors and concerns, and should not assume away such issues as varied investor time horizons, wealth levels, and sensitivity to loss. Third, it s more useful to think in terms of cumulative returns, which reflect what an investor actually receives, than it is to focus on arithmetic average returns, which can be associated with an extremely wide array of investment outcomes. Finally, sequence of return risk has important implications for the structure of TDF glide paths. We believe that the glide path should structure the de-risking process so as to reduce risk in the years leading up to and including retirement because it is so important to minimize the potentially disastrous effects of an unlucky sequence of returns at this crucial stage in the wealth and life cycles. Specifically, the level of one s wealth is a critical factor in structuring an optimal glide path and target date series to maximize the probability of securing a successful retirement. A glide path that recognizes and incorporates this information is, by definition, one that is most likely to be held by investors for the full investment horizon. We can t emphasize this enough: What s to be gained from a glide path which few investors can tolerate holding for its intended horizon given the volatility and sensitivity to sequence of returns risk? Our analysis suggests that TDFs would do well to use a relatively flat glide path and reach their most conservative allocation at the retirement date investor equity exposure would then be at the lowest point in the entire glide path, which is consistent with minimizing sequence of return risk, but should also provide enough growth potential to fund a long retirement. Meanwhile, investor allocation to diversifiers (such as volatility or other risk hedges) would be at their highest level at any point in the glide path upon reaching the target date, and should sustain at this level through retirement. This is consistent with research showing that to retirement glide paths provide better outcomes for investors than those running through retirement. 10

11 You should consider the fund s investment objectives, risks, charges and expenses carefully before you invest. The fund s prospectus or summary prospectus, which can be obtained by visiting americancentury.com, contains this and other information about the fund, and should be read carefully before investing. The performance of the portfolios is dependent on the performance of their underlying American Century Investments funds and will assume the risks associated with these funds. The risks will vary according to each portfolio s asset allocation, and a fund with a later target date is expected to be more volatile than one with an earlier target date. The target date is the approximate year when investors plan to start withdrawing their money. The principal value of the investment is not guaranteed at any time, including at the target date. Each portfolio seeks the highest total return consistent with its asset mix. Each year, the asset mix and weightings are adjusted to be more conservative. In general, as the target year approaches, the portfolio s allocation becomes more conservative by decreasing the allocation to stocks and increasing the allocation to bonds and cash alternatives. Material presented has been derived from industry sources considered to be reliable, but their accuracy and completeness cannot be guaranteed. Past performance is no guarantee of future results. This information is not intended to serve as investment advice. Opinions expressed are those of Rich Weiss and Nancy Pilotte and are no guarantee of the future performance of any American Century Investments portfolio. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice. American Century Investment Services, Inc., Distributor 2013 American Century Proprietary Holdings, Inc. All rights reserved. IN-WHP P.O. Box Kansas City, MO