Your decisions aren’t over when your target-date funds mature
Target-date mutual funds offer a simple premise. Their mix of investments is adjusted periodically to try to strike the right balance between risk and reward. The ultimate goal is to provide investors with a healthy balance when they reach their projected retirement dates.
So what happens when your number comes up, and you finally hit your target date?
It’s a common question these days, as baby boomers invested in 2010 or 2015 funds shift from decades of saving to spending what they’ve built up.
Well, they can’t kiss investment worries goodbye.
Many are realizing they must stretch their savings longer than previous generations. Life expectancies are greater, and the recession has forced many to rethink retirement plans.
Then there’s the increasingly wide range of approaches these funds take.
Some funds aim to carry investors through a decades-long retirement, while others are focused on meeting their savings goal at the time of retirement. Either way, the investment mixes they hold vary depending on the manager’s philosophy about how to best achieve retirement security.
If you’re contemplating retirement in the next few years, review whether recent life changes merit sticking with the target-date fund you likely chose years ago. Another target-date fund or a different investment altogether might be better for your retirement account, now that you’re preparing to live off of your savings.
“It’s very easy as you’re saving to kind of be on autopilot,’’ says Anne Lester, manager of target-date funds at J.P. Morgan Asset Management, which hold nearly $4.5 billion in assets.
“One of the hardest things about the shift into retirement is making sure you stay on top of the risks you face.’’
Target-date mutual funds anchor many 401(k)s and other retirement accounts. They appeal to hands-off investors because the fund company’s managers automatically adjust investments to a more conservative mix the closer you get to retirement — a feature known as the fund’s glide path. The allocation of stocks, bonds and other assets may continue to shift as long as 30 years after the target year.
Here are four tips for older investors reviewing whether their target-date fund is still a good fit:
■ Determine fund’s objective: About half of target-date funds are designed to meet an investor’s objectives up to the point of retirement, but not necessarily beyond it.
Others are intended to last throughout retirement, continuing to shift the asset mix to gradually reduce the risk of a market decline gutting a portfolio. The distinction between “to’’ and “through’’ funds is crucial for investors.
“To’’ funds don’t change their asset allocation after their target year. J.P. Morgan’s SmartRetirement funds are one example. Lester says the “to’’ approach makes sense for the large number of investors who shuffle money between investment accounts at retirement. It’s also suitable for those who cash out substantial amounts from savings. Given the wide range of decisions investors make at retirement, it’s best to make the retirement date the focus of a target-date strategy, then adjust the portfolio at that point to ensure adequate income and appropriate risks throughout retirement, Lester says.
The “through’’ approach is favored at the three biggest target-date fund providers, Fidelity, Vanguard, and T. Rowe Price. These funds recognize the need to stick with a consistent strategy throughout a retirement that could last three decades or longer, says Jerome Clark, manager of T. Rowe Price’s target-date lineup. New retirees, he says, should never think of themselves as short-term investors. That’s one reason why T. Rowe Price’s funds emphasize a high allocation to stocks for retirees, given the greater long-term growth potential stocks offer versus bonds. For example, 55 percent of T. Rowe Price’s 2010 fund is currently in stocks, compared with as little as 20 percent for other 2010 funds on the market. The stock allocation in T. Rowe Price’s fund will bottom out at 20 percent in 2040, when a typical 2010 fund investor would be 95.
Read disclosures such as the fund’s prospectus, which will indicate which approach the fund takes. Many investors might benefit from a “to’’ approach if they’re cashing out at retirement. But those who work well beyond their projected retirements and expect to live a long time might be better served by a “through’’ fund.
■ Check details: Investors should learn how a fund attempts to reach its goal. One common misperception is that “through’’ funds are riskier because they typically have larger stock allocations. A recent Morningstar report cites Wells Fargo’s Advantage Dow Jones target-date funds as an example, which it classifies as “through’’ funds. Yet Wells Fargo’s 2010 fund has less than a 25 percent stock allocation, decreasing to 15 percent by 2015, making it conservative from an asset allocation standpoint.
■ Mix and match: Investors who start out in target-date funds are advised to pick one with a date most closely matching their projected retirement year. You might end up retiring a few years before or after that date. If you’re in a 2015 fund, but are retiring now, you might have more investment risk than you’re comfortable with. Consider shifting some of your 2015 fund holdings into a 2010 fund, to strike the right balance.
■ Consider risks: A meeting with a certified financial planner is often a smart move as you approach retirement, to assess how your financial needs have changed. Examine investment trade-offs: How much stock volatility can you stomach if you might need to tap into a significant portion of your savings early in retirement? A market downturn could leave you unable to meet short-term needs. On the other hand, stocks’ greater long-term earnings potential could prevent you from outliving your savings.
The advice from Lynette DeWitt, a target-date fund researcher for industry consultant Financial Research Corp.: “Pick a fund that has a glide-path that, at its highest risk levels, does not exceed what you can afford to lose.’’