Target date retirement funds work up to a point. When to reconsider

A retirement savings option that may be smart early in your career will likely need to be reconsidered later.

Target date funds, as they are called, offer a way to put your savings on autopilot: holdings gradually shift away from riskier assets like stocks and into more conservative investments (bonds and, perhaps, cash ) as you approach retirement.

Although they’re designed to be a way to save for retirement, these funds may only make sense for a while, depending on your situation. And as you approach retirement, it’s probably worth considering whether you should ditch your target date fund altogether.

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“When you’re about 10 years away from retirement, say in your mid-50s, you really need to take a holistic view and look at your whole financial picture,” said Chris Mellone, Certified Financial Planner, Financial Advisor at VLP Financial. Consultants in Vienna, Virginia.

“We believe a more personalized asset allocation approach is needed for this segment [of investors]”said Mellone.

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 all 401(k) participants are invested in these funds.

For younger investors or those with little investment experience, target date funds are particularly convenient, advisers say, since the asset allocation reflects a long-term horizon to the retirement (some up to 95% or more in equity), and that there is automatic rebalancing and risk reduction over time.

However, this usefulness may change.

“What’s not so good is you put it on autopilot for the next 20 years and it gets bigger, you progress in your career and your life, and you get other assets” said CFP Charles Sachs, chief investment officer for Kaufman Rossin Wealth in Miami.

“Then the target fund works in isolation, and that’s when you need some coordination,” Sachs said.

When you’re about 10 years away from retirement, let’s say in your mid-50s, you really need to take a holistic view and look at your whole financial picture.

Chris Mellon

financial advisor at VLP Financial Advisors

For example, let’s say you reach a point where your target date fund is 70% stocks and 30% bonds. Let’s also say you have money in another fund that is invested only in stocks or a stock index. Depending on the amount, your stock-to-bond ratio could be closer to 90% to 10%, which may not suit your risk tolerance (generally, how well you can handle market volatility and how long until until you need the money).

“When they start adding investments to their total portfolio, it may mean taking on additional risks that they are unaware of,” said Morningstar analyst Megan Pacholok. “Their allowance is no longer what they thought it was.”

Typically, these funds reach their target year with money still invested in stocks and continue to do so, although some may reduce their stock holdings. For example, the average 2020 target date fund is now about 46% in bonds, 42% in stocks, and the rest in cash and other investments, according to Morningstar Direct. The average mix of stocks and bonds for 2025 target date funds is 47% to 39%.

While some advisors say there’s nothing wrong with continuing to rely on target date funds in retirement, others say there’s reason to reconsider.

For example, if you need to get money out of a stock during a market decline, that could mean selling stocks when they’re down, whether you like it or not.

“If you receive distributions from a target date fund, you’re taking bonds and stocks indiscriminately,” Mellone said. “We prefer to separate these elements and see what makes the most sense for funding distributions.”

For example, if you know you will need to generate $100,000 each year from your retirement savings, you can plan to have a number of years of income—say five years, so $500,000—by cash and bonds, so you aren’t put in the position to sell stocks or other volatile investments in a down market. Early in retirement, this can be particularly detrimental to the long-term value of your nest egg.

The key is to make sure to reassess whether your target date fund still makes sense as your financial life becomes more complex or as you approach retirement.

“It could work for you or against you, but you have to follow it to find out,” Sachs said. “So don’t stare and forget it forever.”

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