Important Assumptions

How is the Monte Carlo calculator used to help plan for college costs? The purpose of the calculator is to provide investors with a reasonable estimate of the amount that their college savings could generate under hypothetical market scenarios over a period of time. The calculator does not project the future costs and expenses of attending college.

The calculator can provide information about three variables:

• the initial investment needed to reach a goal;
• the periodic investments needed; and
• the total or target amount that a given investment approach may generate over time.

The investor first selects the simulation success rate — the percentage probability that a particular investment goal could be achieved in our hypothetical scenarios. Next the investor provides two of the other variables, and the calculator provides the third. An important use of information provided by the calculator is to highlight the trade-off between the amounts invested and the simulation success rate. Specifically, increases in the amounts invested initially and periodically can increase the investor’s chances of reaching the investment goal until, after a point, such increases have a diminishing impact on improving the success rate. The Monte Carlo aspect of the calculation reflects its use of the law of large numbers in providing a degree of certainty for future outcomes based on a statistically relevant number of similar outcomes in hypothetical situations. The calculator, in effect, captures and quantifies the uncertainties surrounding any market projection, instead of merely providing a projected value for a variable.

Important Legal Information

This calculator is designed to be an informational and educational tool only, and when used alone, does not constitute investment advice. We strongly recommend that you read all information contained in our Enrollment Kit before making an investment in the College Savings Plans of Maryland. We also encourage you to review your investment strategy periodically as your financial circumstances change.

This model is provided as a rough approximation of future financial performance. Actual results could produce different outcomes, some better and some worse than those illustrated by the calculator, since it is not possible to anticipate every possible combination of financial market returns. Neither the College Savings Plans of Maryland nor T. Rowe Price Associates, Inc. and their respective affiliates are responsible for (i) the consequences of any decisions or actions taken in reliance upon or as a result of the information provided by these tools and (ii) any human or mechanical errors or omissions.

The Calculator’s limitations

Limitations include but are not restricted to the following:

• The actual probability distributions of monthly returns may have a higher concentration in the tails of the curve than the normal distribution. This means the market extremes (and potential for loss) may occur more often than we have projected.
• The model’s parameters represent our best view of the next 21 years, but are unlikely to reflect actual investment returns worldwide over this period.
• Some asset classes (e.g. international stocks) have relatively limited histories, so less historical data are available than for other asset classes.
• In the future, certain asset classes may exhibit increasing correlation due to the globalization of markets. In addition, correlation tends to increase during market crises. Either short- or long-term increases in correlation would reduce the model’s accuracy in projecting overall portfolio volatility and return.

The asset classes selected and expenses for the investment model are based upon the investment options available under the Maryland College Investment Plan. Use of the calculator may not be appropriate in connection with other college savings plans that have different expenses and investment options. The principal assumptions built into these calculations are discussed below.

How do we model potential investment returns?

A basic step in helping you develop an appropriate college savings plan is examining the performance of a variety of portfolios in 1,000 scenarios that simulate how the securities markets could perform in the future. (The portfolios comprise varying proportions of the eight asset classes listed in the next section. These asset classes substitute for the T. Rowe Price funds that actually compose the 529 Plan’s portfolios). These scenarios do not represent actual or historical performance of individual securities or mutual funds but rather a range of potential performance of the asset classes we modeled. An objective of the modeling process is to derive what we believe are reliable estimates of total monthly returns for each investment mix in 1,000 hypothetical situations. In each simulated scenario, the value of the hypothetical portfolio is increased or decreased by the amount of its monthly gain or loss. Simulation success rates are generated by aggregating the 1,000 scenarios to determine how each college savings and investment strategy behaved over the investment period.

Assumed rates of return

As a starting point, we considered the historical average annual returns for eight major types of assets (listed below). But for modeling purposes, we also considered the current, volatile market environment and our expectations for the future to estimate what we believe are reasonably likely returns over the next 21 years.