A retirement savings option that might be smart at the start of your career may need to be revisited along the way.
Target-date funds, as they’re called, provide a way to put your savings on autopilot: Investment conglomerates gradually shift away from riskier assets like stocks and directions Move to more conservative investments (bonds and, possibly, cash) as you approach retirement.
While they’re designed to be a “put it and forget it” way to save for retirement, these sums may only make sense for a while, depending on your situation. And as you near retirement, perhaps you should check whether you should ditch your target date fund altogether.
“When you’re about 10 years away from retirement, say in your 50s, you really need to take a big picture and look at your financial picture,” said Financial Planner. Certified Principal Chris Mellone, VLP Financial Advisor said Advisors in Vienna, Virginia.
“We believe a more customized asset allocation method is needed for this segment [of investors]”, Mellone said.
According to Morningstar, about $1.8 trillion is invested in target date mutual funds. Most 401(k) plans – 98% – include this type of fund in their lineup, according to Vanguard. And 80% of the total 401(k) participants are invested in these funds.
For young investors or those with little investment experience, target-date funds are especially practical, the advisers say, since asset allocation reflects a long period of time until retire (some can go as high as 95% or more in stocks) and have automatic rebalancing and risk reduction over time.
However, that usefulness is subject to change.
“The bad thing is that you put it on autopilot for the next 20 years and as it gets bigger and bigger, you’re making progress in your career and in life, and you’re getting riches,” said CFP Charles Sachs. other assets” investment director at Kaufman Rossin Wealth in Miami.
“Then the target fund is working individually, and that’s when you need coordination,” says Sachs.
When you’re about 10 years away from retirement, say in your 50s, you really need to take a big picture and look at your financial picture.
Chris Mellone
financial advisor with VLP Financial Advisors
For example, let’s say you reach a point where your target date fund is 70% in stocks and 30% in bonds. Also, let’s say you have money in another fund that only invests in stocks or stock indexes. Depending on the amount, your bond-to-stock ratio may be higher than 90%-10%, which may not match your risk tolerance (generally you can get how well the market moves and how long it takes until you need the money).
“As they start adding investments to their total portfolio, that can mean taking on additional risk without their knowledge,” said Megan Pacholok, an analyst at Morningstar. . “Their allocation is not what they thought it was.”
Overall, these funds hit their target for the year with the money still invested in stocks and continue to do so, although some funds may reduce their equity holdings. For example, the average 2020 target date fund is currently about 46% in bonds, 42% in stocks, and the rest in cash and other investments, according to Morningstar Direct. The average stock-bond mix for 2025 target date funds is 47%-39%.
While some advisors say there’s nothing wrong with continuing to rely on a target date fund in retirement, others say there are reasons to reconsider.
For example, if you need to cash out a stock during a market retracement, that could mean selling stocks when they drop in price – whether you want to or not.
“If you’re distributing from a target date fund, you’re drawing from both bonds and stocks indiscriminately,” says Mellone. “We wanted to break those down and see what makes the most sense for funding distribution.”
For example, if you know you’ll need to generate $100,000 from your retirement savings each year, you can plan to have a valuable income over a certain number of years – say 5 years, so $500,000 – in cash and bonds, so you’re not putting in a short position in stocks or other volatile investments in a bear market. When it comes to retirement, it can be especially detrimental to the long-term value of the eggs in your nest.
The bottom line is be sure to re-evaluate whether your target date fund is still reasonable as your financial life gets more complicated or you’re approaching retirement.
“It can work for you or against you, but you have to watch it to know,” says Sachs. “So don’t set and forget it forever.”
