T. Rowe Price Retirement 2030 Fund

N-CSR 1 arrpc.htm T. ROWE PRICE RETIREMENT 2030 FUND T. Rowe Price Retirement 2030 Fund - May 31, 2007

Item 1: Report to Shareholders

Retirement 2030 Fund

May 31, 2007

The views and opinions in this report were current as of May 31, 2007. 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 fund’s 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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Manager’s Letter

Fellow Shareholders

The past year was kind to investors, with major global asset classes reporting results that ranged from good to spectacular. Returns were generally strong during the past six months as well, although high-quality U.S. bonds struggled as interest rates rose amid concerns about economic growth and inflation. The Retirement Funds, which are broadly diversified across global asset classes, benefited from this positive environment, generating returns that are well above the historical annual averages for equities.

We would like to welcome new shareholders to the T. Rowe Price Retirement Funds. Since our semiannual report last November, we have added two new funds to help investors better target their retirement dates and made other enhancements that we believe should help investors achieve and maintain a financially successful retirement. After looking at the recent market environment, we will review the funds’ objectives and strategy.

HIGHLIGHTS

• Most global asset classes registered strong returns over the past year.

• The Retirement Funds benefited from the strong global environment, posting solid gains for the fiscal year.

• We continued to overweight stocks relative to bonds, which generally aided the funds’ performance.

• Although we are pleased with the past year’s results, we remain focused on the funds’ disciplined strategy and broad diversification, which we believe can help shareholders achieve their retirement-funding goals.

MARKET ENVIRONMENT

Economic growth decelerated over the last year, as the housing sector’s weakness persisted and the market for mortgage loans to homebuyers with greater credit risks came under pressure. In fact, first-quarter GDP growth in 2007 was measured at an annualized rate of 0.6%, which was the lowest reading in several years and was well below the 5.6% growth rate in the first quarter of 2006. Yet the healthy labor market—national unemployment dipped to 4.4% in March, which was nearly a six-year low—and rising energy, food, and import prices kept inflation above the 1% to 2% comfort zone of Federal Reserve officials. The Fed kept the fed funds target rate at 5.25% for most of our fiscal year because central bank officials continue to believe that slower growth will allow inflation to ease over time. However, the Fed has acknowledged an increase in economic uncertainty stemming from the weak housing market.

As shown in the graph, money market yields were little changed over the last year, reflecting the Fed’s maintenance of the 5.25% fed funds target rate since the end of June 2006. Intermediate- and long-term interest rates declined in aggregate over the last year, but they increased in the last six months, as inflation remained elevated and as hopes dwindled for the Fed to stimulate the economy with lower short-term interest rates.

Long-term interest rates are usually higher than short-term rates because investors typically demand higher returns for committing their capital for longer periods, but the Treasury yield curve—a depiction of the relationship between the yields of government bonds with various maturities—was inverted for most of the last year, as longer-term rates declined and remained below the 5.25% fed funds rate. An inverted yield curve is often a harbinger of slower economic growth.

Thanks to favorable corporate fundamentals and a significant increase in mergers and private-equity deals, U.S. stocks advanced over the last year, and several major indexes, including the S&P 500, reached new all-time highs. Large-cap shares outperformed their smaller brethren: The S&P 500 Index returned 10.29% and 22.78% in the 6- and 12-month periods ended May 31, 2007, respectively. Value stocks surpassed growth across all market capitalizations over the last year, but small-cap growth stocks outpaced small-cap value shares in the last six months.

U.S. bonds generally produced moderate returns over the last year, but gains were modest in the last six months, as income was mostly offset by falling bond prices in response to rising intermediate- and long-term interest rates. In the investment-grade universe, mortgage-and asset-backed securities fared best in the second half of our fiscal year, whereas corporate and Treasury bonds lagged, especially long-term issues. High-yield bonds outperformed higher-quality securities throughout the last year, as investors seeking higher income continued to embrace risk. The Lehman Brothers U.S. Aggregate Index, a broad measure of the taxable, domestic, investment-grade bond market, returned 0.69% in the last six months and 6.66% for the 12-month period.

Non-U.S. stocks outperformed their domestic counterparts over the last year, led by emerging market equities in Latin America and Asia. Among developed markets, European bourses produced strong returns, but Japanese shares lagged significantly. The MSCI EAFE Index, which measures the performance of mostly large-cap stocks in Europe, Australasia, and the Far East, returned 14.41% in the last six months and 27.39% in the one-year period.

HOW OUR RETIREMENT FUNDS WORK

As life expectancies have increased and traditional company pensions have diminished, more of the retirement savings burden now falls on individuals, who face the specter of outliving their assets. Our Retirement Funds help investors address this new retirement landscape. The funds are designed to provide shareholders a single, diversified portfolio that is managed to a specific retirement date and continues to provide appropriate asset allocation throughout retirement. Each Retirement Fund offers exposure to different asset classes and market capitalizations. The funds include international as well as domestic investments and both growth and value investment styles. The funds are “funds of funds,” achieving their diversification by investing in other T. Rowe Price mutual funds.

The target-date funds systematically shift their allocations over time, investing in an appropriate proportion of stock and bond funds as the target retirement date draws near. The closer each fund gets to the stated retirement date, the more conservative its asset mix becomes, placing a greater emphasis on income and reducing investors’ overall risk. These shifts are intended to facilitate the accumulation of assets prior to retirement, as well as help investors manage their assets after retiring.

What makes our funds different is that we think investors need a greater allocation to stocks—both before and during retirement—than has generally been recommended to achieve their long-term retirement goals. Where many similar strategies reach a stable, typically very conservative allocation to stocks shortly after they reach their target date, our funds have approximately 55% in stocks at their target dates, and that allocation gradually diminishes over the next three decades. About 30 years after its designated retirement year, each fund will reach and maintain a stock allocation of about 20%. The Retirement 2005 Fund, for example, has reached its target date but continues its gradual equity reduction. At the other end of the spectrum, the Retirement 2050 and 2055 Funds are at their highest equity allocation of approximately 90%. For all target-date funds, the remaining assets are invested in fixed-income securities, including short-term securities. For those who prefer a more traditional asset allocation strategy, the Retirement Income Fund maintains an asset allocation of about 60% bonds and 40% stocks.

The funds’ managers may make some limited tactical variations to each fund’s target allocation. The T. Rowe Price Asset Allocation Committee considers adjustments to the weightings of stocks, bonds, and money market securities within the appropriate ranges for each fund based on market conditions and economic fundamentals.

We believe the funds offer a convenient approach to retirement investing because investors do not have to determine a suitable asset allocation strategy, select the funds to implement the strategy, worry about managing the asset allocation strategy over time, or make tactical adjustments in response to changing market conditions. Since the underlying funds invest domestically and internationally in a wide range of equity and bond market sectors, investors gain the benefits of diversification as well as the expertise of individual fund managers who invest in these areas on a daily basis. Fund expenses are limited to the expenses of the underlying funds, so there is no additional management fee charged for the asset allocation services we provide.

STRATEGY

The Retirement Funds continued to maintain a tactical overweight position in stocks relative to bonds. That overweight stood at 2.75% a year ago. We reduced it to 2% in November 2006 and further decreased it in December to 1.75%, where it stood at the end of our fiscal year on May 31, 2007. Our overweight indicates that we continue to think equities should perform better than bonds over the next couple of years, but moderating economic growth is likely to mean that profit growth will decelerate somewhat. Among domestic stocks, we favored large-capitalization stock funds relative to funds that invest in smaller companies because we believe large companies will benefit from greater exposure to faster growing regions outside the U.S.

We were (and remain) neutral in established non-U.S. equity markets, but underweighted in emerging markets equities. We believe valuations are reasonable in developed markets, particularly as productivity increases are helping to maintain earnings growth. Emerging markets have rebounded from a sharp sell-off in the second quarter of 2006. Emerging economies are fundamentally stronger than in the past, but may be challenged by lower global growth.

Within the fixed-income allocation, we increased our exposure to short-term bonds as the Fed approached the end of its series of interest rate hikes last year. We have been cautious on investment-grade bonds because of the challenging interest rate environment, and we are modestly underweight in high-yield bonds because of rich valuations within that sector. In general, high-yield fundamentals remain favorable with good corporate profits and historically low corporate default rates.

PERFORMANCE REVIEW

We think the Retirement Funds’ performance is best benchmarked against each fund’s combined index portfolio, as shown in the Performance Comparison tables. Our combined index benchmarks are constructed to reflect our actual strategy. The domestic equity allocation (currently composed of the Growth Stock, Value, Equity Index 500, Mid-Cap Growth, Mid-Cap Value, New Horizons, Small-Cap Stock, and Small-Cap Value Funds) is benchmarked to the Dow Jones Wilshire 5000 Composite Index, which tracks the entire U.S. equity market. The corresponding index for our non-U.S. stock allocation (International Stock, International Growth & Income, and Overseas Stock Funds) is the MSCI EAFE Index. Fixed income (New Income and High Yield Funds) is measured against the Lehman Brothers U.S. Aggregate Index, and short-term income (Short-Term Income Fund) by the Citigroup 90-Day U.S. Treasury Bill Index. Tactical allocations between equities and fixed income are not incorporated into the combined index benchmarks.

Our Performance Comparison tables also show the returns for each fund’s respective Lipper target-date categories. Although the categories aren’t always perfect matches—Lipper does not yet have categories in five-year increments—they provide a good idea of how our funds perform relative to funds with similar objectives. We continue to show our broad market benchmarks—the Dow Jones target-date indexes—in our Growth of $10,000 tables following this letter. In general, we think these indexes are not as good a fit as our blended benchmarks because their allocation shifts do not match ours and because their construction tends to overweight certain sectors beyond their true weight relative to the overall market. They also have less exposure to stocks than our funds as retirement nears and during the retirement years.

The Retirement Funds generally benefited from the overweight in equities relative to fixed income as both domestic and non-U.S. equities outperformed investment-grade bonds during the 6- and 12-month periods ended May 31, 2007. We were also overweight in large-cap stock funds relative to small-company funds, which aided results as larger companies outperformed for both periods. On an absolute basis, the strongest returns (for the 12-month period) came from the Mid-Cap Value, Value, and Growth Stock Funds. For the six-month period, the Mid-Cap Growth, Mid-Cap Value, Value, and Growth Stock Funds had the best absolute returns. Relative to their respective underlying benchmarks, the Growth Stock Fund and the Mid-Cap Value Fund had the best returns for the 12-month period. They were also the only funds that outperformed their respective benchmarks for the year. Over the past six months, the Mid-Cap Growth, Small-Cap Value, and Growth Stock Funds had the strongest returns. The Equity Index 500 Fund was the only fund that lagged its benchmark for the six-month period.

Returns were mixed within the non-U.S. equity portion of the portfolios, as the value-oriented International Growth & Income Fund outperformed the MSCI EAFE Index for both the 6- and 12-month periods, while the International Stock Fund lagged the benchmark for both periods. Overall, the non-U.S. equity portion of the portfolios lagged the benchmark (MSCI EAFE Index) for the fiscal year and performed in line with the benchmark for the most recent six months.

Within our fixed-income allocation, the High Yield Fund significantly outperformed the Lehman Brothers U.S. Aggregate Index during both periods, which helped portfolio performance. The New Income Fund outperformed the Lehman index for the 12-month period and performed in line with the benchmark during the six-month period. Within the short-term income allocation, short-term bonds lagged cash.

NEW INVESTMENT OPTION

Effective June 29, 2007, each of the Retirement Funds will add the T. Rowe Price Emerging Markets Stock Fund to its roster of underlying funds and increase its international equity allocation.

The addition of the Emerging Markets Stock Fund as an underlying investment option reflects the continued growth and impact of emerging markets. For example, emerging markets stocks now account for about 15% of the MSCI All-Country World ex-U.S. Index. Despite shorter-term concerns about valuations of emerging markets, we believe there is a compelling investment case for the addition of this asset class to Retirement Fund portfolios, as our international equity managers believe that over the long term, emerging markets are attractive relative to global developed markets from an earnings and GDP growth perspective. Our analysis determined that the capitalization of emerging markets has grown to the point where it represents a significant portion of the total global equity market and an important investment opportunity.

We are increasing the international equity portion of the Retirement Funds’ equity allocation as a result of the increasing share of global GDP and the value of total global equity markets that developed and emerging non-U.S. equity markets now represent. Today, non-U.S. equity markets (including emerging markets) represent about 55.6% of the world equity markets’ capitalization, and the U.S. equity market represents about 44.4% —a reversal from the early years of this decade when the U.S. market represented more than 50% of the world’s investment opportunities. The Asset Allocation Committee determined that increasing the international equity allocation allows the Retirement Funds to take better advantage of investment opportunities outside the U.S.

The increase in the Retirement Funds’ international equity position is expected to be built up incrementally over the next year. The funds may decide not to invest immediately in the eligible emerging markets allocation, primarily due to our concerns over relative valuations as developing markets have risen significantly over the past few years. Once the Asset Allocation Committee decides to begin investing in the dedicated emerging markets allocation, we expect to build positions incrementally over the next two years. However, in either case the funding time line may be accelerated, depending on market conditions.

RETIREMENT INCOME FUND
The Retirement Income Fund’s investment objective is to generate the highest total return consistent with an emphasis on both capital growth and income. The neutral allocation for the fund is 60% bonds and 40% stocks. The fund implements its strategy by investing in a set of underlying T. Rowe Price mutual funds.

The Retirement Income Fund returned 5.94% over the six months ended May 31, 2007, modestly outperforming its combined index portfolio but lagging its Lipper average of similar funds. The fund returned 13.31% for the past year, again outperforming its blended benchmark but trailing its Lipper peer group average. Returns for the fund’s Advisor and R Class shares were slightly lower, reflecting their additional expenses.

The fund benefited from the good performance of its fixed-income allocations during the 6- and 12-month periods. The domestic stock portion of the fund lagged its underlying benchmark (the Dow Jones Wilshire 5000 Composite Index) during the 12-month period, but outperformed the benchmark over the most recent six months. The fund’s short-term income portion lagged its benchmark during the six-month period as short-term bonds lagged cash, but performed in line with the benchmark for the year. The international equity portion of the fund also underperformed its benchmark during the 12-month period but performed in line during the six-month period. Please see the Performance Review on page 5 for a closer look at the fund’s performance.

As of May 31, the fund’s assets were invested in T. Rowe Price funds according to the target and actual allocations shown on page 21. Actual allocations reflected the Asset Allocation Committee’s decision to overweight stocks relative to bonds but to reduce that overweight slightly during the past six months. At the end of the period, the target allocations were 58.25% for cash and bond funds, up from 57.75% at the end of November, and 41.75% for stock funds, down from 42.25% six months ago.

RETIREMENT 2005 FUND
The Retirement 2005 Fund’s investment objective is to provide the highest total return consistent with an emphasis on both capital growth and income. The fund invests in a diversified portfolio, with both an increasing allocation to bonds and an increasing emphasis on short-term bonds over time, and implements its strategy by investing in a set of underlying T. Rowe Price mutual funds. The fund will reach its most conservative strategic allocation to stocks (approximately 20%) about 30 years after the year 2005.

The Retirement 2005 Fund returned 7.00% over the six months ended May 31, 2007, and 15.66% for the 12 months. The fund outperformed its combined index portfolio and Lipper average of similar funds during both periods.

The fund benefited from the strong performance of its fixed-income allocation during both the 6- and 12-month periods, although the short-term income allocation lagged the benchmark during the six-month period. The international equity allocation underperformed its benchmark during the 12-month period, but performed in line during the most recent half year. The fund’s domestic equity allocation outperformed the benchmark during the six-month period but narrowly lagged for the year. Please see the Performance Review on page 5 for a closer look at the fund’s performance.

As of May 31, the fund’s assets were invested in T. Rowe Price funds according to the target and actual allocations shown on page 21. Actual allocations reflected the Asset Allocation Committee’s decision to overweight stocks relative to bonds but to reduce that overweight slightly during the past six months. At the end of the period, the target allocations were 46.75% for cash and bond funds, up from 45.25% at the end of November, and 53.25% for stock funds, down from 54.75% six months ago.

RETIREMENT 2010 FUND
The Retirement 2010 Fund’s investment objective is to provide the highest total return consistent with an emphasis on both capital growth and income. The fund invests in a diversified portfolio, with both an increasing allocation to bonds and an increasing emphasis on short-term bonds over time, and implements its strategy by investing in a set of underlying T. Rowe Price mutual funds. The fund will reach its most conservative strategic allocation to stocks (approximately 20%) about 30 years after the year 2010.

The Retirement 2010 Fund returned 8.18% during the past six months and 17.42% for the 12 months. The fund outperformed its combined index portfolio and Lipper average of similar funds over both periods. Returns for the fund’s Advisor and R Class shares were slightly lower, reflecting their additional expenses.

The fund benefited from the strong performance of its fixed-income allocation during both the 6- and 12-month periods, although the short-term income allocation lagged the benchmark during the six-month period. The international equity allocation underperformed its benchmark during the 12-month period, but performed in line during the most recent half year. The fund’s domestic equity allocation outperformed the benchmark during the six-month period and performed roughly in line for the year. Please see the Performance Review on page 5 for a closer look at the fund’s performance.

As of May 31, the fund’s assets were invested in T. Rowe Price funds according to the target and actual allocations shown on page 22. Actual allocations reflected the Asset Allocation Committee’s decision to overweight stocks relative to bonds but to reduce that overweight slightly during the past six months. At the end of the period, the target allocations were 36.75% for cash and bond funds, up from 35.75% at the end of November, and 63.25% for stock funds, down from 64.25% six months ago.

RETIREMENT 2015 FUND
The Retirement 2015 Fund’s investment objective is to provide the highest total return consistent with an emphasis on both capital growth and income. The fund invests in a diversified portfolio, with both an increasing allocation to bonds and an increasing emphasis on short-term bonds over time, and implements its strategy by investing in a set of underlying T. Rowe Price mutual funds. The fund will reach its most conservative strategic allocation to stocks (approximately 20%) about 30 years after the year 2015.

The Retirement 2015 Fund returned 9.13% and 18.95% over the six and 12 months ended May 31, respectively. The fund outperformed its combined index portfolio and Lipper average of similar funds for both periods.

The fund benefited from the strong performance of its fixed-income allocation during both the 6- and 12-month periods, although the short-term income allocation lagged the benchmark during the six-month period. The international equity allocation underperformed its benchmark during the 12-month period, but performed in line during the most recent half year. The fund’s domestic equity allocation outperformed the benchmark during both periods. Please see the Performance Review on page 5 for a closer look at the fund’s performance.

As of May 31, the fund’s assets were invested in T. Rowe Price funds according to the target and actual allocations shown on page 22. Actual allocations reflected the Asset Allocation Committee’s decision to overweight stocks relative to bonds but to reduce that overweight slightly during the past six months. At the end of the period, the target allocations were 28.75% for cash and bond funds, up from 27.75% at the end of November, and 71.25% for stock funds, down from 72.25% six months ago.

RETIREMENT 2020 FUND
The Retirement 2020 Fund’s investment objective is to provide the highest total return consistent with an emphasis on both capital growth and income. The fund invests in a diversified portfolio, with both an increasing allocation to bonds and an increasing emphasis on short-term bonds over time, and implements its strategy by investing in a set of underlying T. Rowe Price mutual funds. The fund will reach its most conservative strategic allocation to stocks (approximately 20%) about 30 years after the year 2020.

The Retirement 2020 Fund returned 9.95% for the six months ended May 31, 2007, and 20.30% for the 12 months. Returns for the fund’s Advisor and R Class shares were slightly lower, reflecting their additional expenses. The fund outperformed its combined index portfolio and Lipper average of similar funds over both periods.

The fund benefited from the strong performance of its fixed-income allocation during both the 6- and 12-month periods, although the short-term income allocation lagged the benchmark during the six-month period. The international equity allocation underperformed its benchmark during the 12-month period, but performed in line during the most recent half year. The fund’s domestic equity allocation outperformed the benchmark during both periods. Please see the Performance Review on page 5 for a closer look at the fund’s performance.

As of May 31, the fund’s assets were invested in T. Rowe Price funds according to the target and actual allocations shown on page 23. Actual allocations reflected the Asset Allocation Committee’s decision to overweight stocks relative to bonds but to reduce that overweight slightly during the past six months. At the end of the period, the target allocations were 21.25% for cash and bond funds, up from 20.25% at the end of November, and 78.75% for stock funds, down from 79.75% six months ago.

RETIREMENT 2025 FUND
The Retirement 2025 Fund’s investment objective is to provide the highest total return consistent with an emphasis on both capital growth and income. The fund invests in a diversified portfolio, with both an increasing allocation to bonds and an increasing emphasis on short-term bonds over time, and implements its strategy by investing in a set of underlying T. Rowe Price mutual funds. The fund will reach its most conservative strategic allocation to stocks (approximately 20%) about 30 years after the year 2025.

The Retirement 2025 Fund returned 10.62% over the six months ended May 31, 2007, and 21.32% for the year. The fund outperformed its combined index portfolio and Lipper average of similar funds over both periods.

The fund benefited from the strong performance of its fixed-income allocation during both the 6- and 12-month periods, although the short-term income allocation lagged the benchmark during the six-month period. The international equity allocation underperformed its benchmark during the 12-month period, but performed in line during the most recent half year. The fund’s domestic equity allocation outperformed the benchmark during both periods. Please see the Performance Review on page 5 for a closer look at the fund’s performance.

As of May 31, the fund’s assets were invested in T. Rowe Price funds according to the target and actual allocations shown on page 23. Actual allocations reflected the Asset Allocation Committee’s decision to overweight stocks relative to bonds but to reduce that overweight slightly during the past six months. At the end of the period, the target allocations were 15.25% for bond funds, up from 14.25% at the end of November, and 84.75% for stock funds, down from 85.75% six months ago.

RETIREMENT 2030 FUND
The Retirement 2030 Fund’s investment objective is to provide the highest total return consistent with an emphasis on both capital growth and income. The fund invests in a diversified portfolio, with both an increasing allocation to bonds and an increasing emphasis on short-term bonds over time, and implements its strategy by investing in a set of underlying T. Rowe Price mutual funds. The fund will reach its most conservative strategic allocation to stocks (approximately 20%) about 30 years after the year 2030.both an increasing allocation to bonds and an increasing emphasis on short-term bonds over time, and implements its strategy by investing in a set of underlying T. Rowe Price mutual funds. The fund will reach its most conservative strategic allocation to stocks (approximately 20%) about 30 years after the year 2030.

The Retirement 2030 Fund returned 11.16% over the six months ended May 31, 2007, and 22.11% for the 12-month period. The fund outperformed its combined index portfolio and Lipper average of similar funds for both periods.

The fund benefited from the strong performance of its fixed-income allocation during both the 6- and 12-month periods, although the short-term income allocation lagged the benchmark during the six-month period. The international equity allocation underperformed its benchmark during the 12-month period, but performed in line during the most recent half year. The fund’s domestic equity allocation outperformed the benchmark during both periods. Please see the Performance Review on page 5 for a closer look at the fund’s performance.

As of May 31, the fund’s assets were invested in T. Rowe Price funds according to the target and actual allocations shown on page 24. Actual allocations reflected the Asset Allocation Committee’s decision to overweight stocks relative to bonds but to reduce that overweight slightly during the past six months. At the end of the period, the target allocations were 10.25% for bond funds, up from 9.25% at the end of November, and 89.75% for stock funds, down from 90.75% six months ago.

RETIREMENT 2035 FUND
RETIREMENT 2040 FUND
RETIREMENT 2045 FUND
The investment objective of the Retirement 2035, 2040, and 2045 Funds is to provide the highest total return consistent with an emphasis on both capital growth and income. The funds invest in diversified portfolios, with both an increasing allocation to bonds and an increasing emphasis on short-term bonds over time, and implement their strategies by investing in a set of underlying T. Rowe Price mutual funds. The funds will reach their most conservative strategic allocation to stocks (approximately 20%) about 30 years after their target dates.

The Retirement 2035, 2040, and 2045 Funds will follow similar investment paths for some years before their allocations begin to differ. Until that time, their performance will be measured against the same combined index portfolio. Each has a different Dow Jones Target benchmark (shown in the Growth of $10,000 tables after this letter), but share the same combined index portfolio and Lipper category. The funds are managed as separate portfolios; because of asset flows and other technical considerations, their total returns will vary, and their allocations to underlying funds may also be slightly different.

The funds posted strong returns and outperformed their combined index portfolio benchmark and Lipper average of similar funds for both the 6- and 12-month periods. Returns for the 2040 fund’s Advisor and R Class shares were slightly lower, reflecting their additional expenses. The funds benefited from the strong performance of their fixed-income allocations during both the 6- and 12-month periods, although the short-term income allocations lagged the benchmark during the six-month period. The international equity allocations underperformed their benchmark during the 12-month period, but performed in line during the most recent half year. The funds’ domestic equity allocation outperformed the benchmark during both periods. Please see the Performance Review on page 5 for a closer look at each fund’s performance.

As of May 31, the funds’ assets were invested in T. Rowe Price funds according to the target and actual allocations shown on pages 24 and 25. Actual allocations reflected the Asset Allocation Committee’s decision to overweight stocks relative to bonds but to reduce that overweight slightly during the past six months. At the end of the period, the target allocations were 8.25% for bond funds, up from 7.75% at the end of November, and 91.75% for stock funds, down from 92.25% six months ago.

RETIREMENT 2050 FUND
RETIREMENT 2055 FUND
The investment objective of the Retirement 2050 and 2055 Funds is to provide the highest total return consistent with an emphasis on both capital growth and income. The funds invest in diversified portfolios, with both an increasing allocation to bonds and an increasing emphasis on short-term bonds over time, and implement their strategies by investing in a set of underlying T. Rowe Price mutual funds. The funds will reach their most conservative strategic allocation to stocks (approximately 20%) about 30 years after their target dates.

The Retirement 2050 and 2055 Funds began operations on December 29, 2006. They will follow similar investment paths for some years before their allocations begin to differ. Until that time, their performance will be measured against the same combined index portfolio and Lipper category. The funds are managed as separate portfolios; because of asset flows and other technical considerations, their total returns will vary, and their allocations to underlying funds may also be slightly different.

With global markets advancing across the board, the funds posted strong returns in the five months since their inception, as shown in the table. Results outpaced the performance of the funds’ combined index portfolio and Lipper peer group average.

As of May 31, the funds’ assets were invested in T. Rowe Price funds according to the target and actual allocations shown on page 26. Actual allocations reflected the Asset Allocation Committee’s decision to overweight stocks relative to bonds but to reduce that overweight slightly during the past five months. At the end of the period, the target allocations were 8.25% for bond funds and 91.75% for stock funds.

OUTLOOK

The Retirement Funds’ strong gains over the past year are gratifying, but we know that these kinds of returns are unusual. We are focused not on the near-term market fluctuations but on maintaining a disciplined, long-term strategy that we believe can help shareholders achieve their retirement-funding goals. Thank you for your confidence in T. Rowe Price.

Respectfully submitted,

Edmund M. Notzon III
President and chairman of the funds’ Investment Advisory Committee

Jerome A. Clark
Vice president and portfolio manager

June 20, 2007

SUPPLEMENT TO PROSPECTUSES
DATED OCTOBER 1, 2006, DECEMBER 29, 2006, AND MAY 31, 2007

The T. Rowe Price Emerging Markets Stock Fund has been added to the list of underlying international funds in which each Retirement Fund can invest. The fund seeks long-term growth of capital through investments primarily in the common stocks of companies located (or with primary operations) in emerging markets. The tables under the subheading “What is each fund’s principal investment strategy?” in Section 1 and the table entitled “Description of Underlying Funds” in Section 3 of each prospectus are hereby revised accordingly.

RISKS 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 fund’s 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 manager’s 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 fund’s 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 fund’s 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.

GLOSSARY

Citigroup 90-Day U.S. Treasury Bill Index: An index designed to track short-term government securities.

Combined Index Portfolios: Blended index portfolios used as benchmarks for each fund. The Combined Index Portfolios are composed of the following indexes:

Retirement Income Fund—An unmanaged portfolio composed of 34.0% Dow Jones Wilshire 5000 Composite Index, 30.0% Lehman Brothers U.S. Aggregate Index, 30.0% Citigroup 90-Day U.S. Treasury Bill Index, 6.0% MSCI EAFE Index.

Retirement 2005 Fund—An unmanaged portfolio composed of 44.0% Dow Jones Wilshire 5000 Composite Index, 36.5% Lehman Brothers U.S. Aggregate Index, 12.0% Citigroup 90-Day U.S. Treasury Bill Index, 7.5% MSCI EAFE Index.

Retirement 2010 Fund—An unmanaged portfolio composed of 52.5% Dow Jones Wilshire 5000 Composite Index, 31.5% Lehman Brothers U.S. Aggregate Index, 7.0% Citigroup 90-Day U.S. Treasury Bill Index, 9.0% MSCI EAFE Index.

Retirement 2015 Fund—An unmanaged portfolio composed of 59.0% Dow Jones Wilshire 5000 Composite Index, 27.0% Lehman Brothers U.S. Aggregate Index, 3.5% Citigroup 90-Day U.S. Treasury Bill Index, 10.5% MSCI EAFE Index.

Retirement 2020 Fund—An unmanaged portfolio composed of 65.5% Dow Jones Wilshire 5000 Composite Index, 21.5% Lehman Brothers U.S. Aggregate Index, 1.5% Citigroup 90-Day U.S. Treasury Bill Index, 11.5% MSCI EAFE Index.

Retirement 2025 Fund—An unmanaged portfolio composed of 70.5% Dow Jones Wilshire 5000 Composite Index, 17.0% Lehman Brothers U.S. Aggregate Index, 12.5% MSCI EAFE Index.

Retirement 2030 Fund—An unmanaged portfolio composed of 75.0% Dow Jones Wilshire 5000 Composite Index, 12.0% Lehman Brothers U.S. Aggregate Index, 13.0% MSCI EAFE Index.

Retirement 2035, 2040, 2045, 2050, and 2055 Funds—An unmanaged portfolio composed of 76.5% Dow Jones Wilshire 5000 Composite Index, 10.0% Lehman Brothers U.S. Aggregate Index, 13.5% MSCI EAFE Index.

Credit Suisse High Yield Index: An index designed to track the high-yield bond market.

Dow Jones Moderately Conservative Portfolio Index: An 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: Indexes composed of different allocations of stocks, bonds, and cash. Each month, beginning 35 years prior to an index’s stated target date, the amount allocated to stocks gradually decreases and the amount allocated to bonds/cash increases in a predefined manner. The target date in each index’s name reflects the year the benchmark’s allocation no longer changes. At that time, the index will become the Dow Jones Target Today Index with a portfolio composed of 20% stocks.

Dow Jones Wilshire 5000 Composite Index: An index that tracks the performance of all U.S. common equity securities.

Lehman Brothers U.S. Aggregate Index: An unmanaged index that tracks domestic investment-grade bonds, including corporate, government, and mortgage-backed securities.

Lehman Brothers 1-3 Year Government/Credit Index: An index that tracks short-term debt instruments.

Lipper averages: Consist of all mutual funds in a particular category as tracked by Lipper Inc.

MSCI EAFE Index: An index that tracks the stocks of about 1,000 companies in Europe, Australasia, and the Far East (EAFE).

Russell 2000 Index: An index that tracks the stocks of 2,000 small U.S. companies.

S&P 500 Stock Index: An index that tracks the stocks of 500 primarily large-cap U.S. companies.

Yield curve: A graph depicting the relationship between yields and maturity dates for a set of similar securities. These curves are in constant flux. One of the key activities in managing any fixed-income portfolio is to study trends reflected by comparative yield curves.

Performance and Expenses

GROWTH OF $10,000

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.