The Target Date Fund is the flagship product of the American retirement plan. And for good reason. They offer turnkey solutions to thorny problems.
But while funds have their merits, they may not work for all investors.
“Target dating funds solve a lack of knowledge and a lack of time for investors,” says Daniel Jerger, a financial planner in Longmont, Colorado. I will not ask the question of
For certain investors, it may make sense to switch target date funds to a more sophisticated approach.
Both the fund’s charm and drawback lie in its simplicity. Target date funds automatically balance their assets, gradually making their stock and bond allocations more conservative as the fund approaches its target date (usually the approximate year in which it is expected to retire). adjust. According to Morningstar, the fund’s total assets will reach its all-time high of $3.27 trillion in 2021. Latest data available.
But a Bank of America research report last June found that target-date funds had poor returns. A typical 2040 fund, likely used by those who joined the workforce in 1995, had a risk profile similar to the S&P 500 but underperformed the index by 2.4% annually, according to the report. The report said the below-average performance was partly due to the fund’s overinvestment in foreign stocks.
Of course, not all target dating funds are created equal. “They may all say she’s in 2045, but each allocation is different,” says Leanna Devinney, her branch leader at Fidelity Investments. “One may be active, one may be passive. The charges will be different. So it’s important to look under the hood and understand what’s there.”
What you find may not match your risk tolerance or goals.
Workers in their 50s or 60s who are not meeting their retirement savings goals may want a more aggressive portfolio strategy. Many funds will begin to shift their asset allocations towards more conservative stock-bond mixes about 10 years before their target date, so you would think target date funds would not be a good fit. In other words, Target Date funds are going in the opposite direction when investors want to shift into high gear.
To better align your investments, consider replacing target date funds with a three-fund approach, says Andy Kapyrin, co-chief investment officer at CI RegentAtlantic Private Wealth in Morristown, New Jersey. One tracks U.S. stocks and one tracks non-U.S. stocks,” he says. This allows you to diversify and adjust your mix of stocks and bonds.
Risk-averse investors, on the other hand, may be offended by the typically large allocations to stocks used early on by target-date funds. Last year’s market volatility was
A 19% decrease can lead to angina pectoris.of
Vanguard target retirement 2055
For example, the fund (ticker: VFFVX) has allocated almost 90% of its funds to equities, down 17% in 2022. Over time, investors can use his three-fund approach to dial down allocations to stocks to better match investments. risk tolerance.
Whether you replace your target date fund with another strategy depends on what investments are available through your retirement plan. In some cases, using a target date fund in your 401(k) makes sense, but you can also supplement your personal retirement account with other funds.
“Not all retirement plans are created equal,” says James Lee, a financial planner in Saratoga Springs, New York. Others are not, and in those cases the Target Dating Fund may be the best choice for the client.
Given that target-date funds may not be suitable for retirement savers, what about retirees? We suggest adopting a more bespoke approach to portfolio construction that allows for tactical adjustments. For example, consider a target date fund that has a 50/50 allocation in stocks and bonds.
“When you claim distributions from that fund, you get half from bonds and half from stocks, sometimes even when the market is off by 20% or more,” says Melllone. “When stocks are going down, you might be selling aggressively. Hmm.”
He suggests swapping Target Date funds about 10 years before retirement when many investors have a clearer idea of what their retirement lifestyle will look like. Melone, who works with both plans and individual investors, said he uses a portfolio of 10 to 15 funds covering various sub-asset classes and investment styles.
“We can be very granular. If a client asks for $5,000 a month, there’s a lot of work going on behind the scenes,” says Mello, who is based in Vienna, Virginia. Different cycles help them keep their money longer. “
Of course, the right strategy for you depends on what kind of investor you are. A customized portfolio has its benefits, but it also comes with complications. Great if you are a practicing investor. But it’s not to everyone’s taste.
“It’s important to have the discipline to access accounts, review portfolio allocations, execute all trades and get back on track,” said Nathan Zahm, head of goal-based investing at Vanguard. said. “This is where the power of a Target Dating Fund or Advisor comes into play. An advisor can be a behavioral coach to ensure you follow through on your plans. I will do it properly.”
write destination Andrew Welsch at email@example.com