ó Target date mutual funds have become the answer to a
problem many retirement savers face in a world that has
shifted the burden of managing retirement assets from
corporations to workers who donít always have the time
or knowledge to be effective money managers.
financial services industry came to the rescue by
providing a simple investment solution in which workers
only needed to pick a date they wished to retire and the
mutual fund took care of the hard work by automatically
adjusting the asset mix in the account to a higher
percentage of safer bonds and a lower percentage of
riskier stocks as the account ownerís retirement date
now, workers often are on the job past the once-common
retirement age of 65 ó and target date funds havenít
target date funds, also known as life cycle funds, hit
the scene in the 1990s, workers who used them were
encouraged to choose a target date that corresponded
with a planned retirement age of 65. Nearly three
decades later, the status quo for most target date funds
is still 65, which many financial advisers believe could
be too conservative in light of more people working
longer and living longer.
most of us, our retirement years will equal that of our
working career," said Jim Meredith, executive vice
president of the Hefren-Tillotson wealth management firm
in Pittsburgh. "Itís not wise for a 65-year-old
person to get overly conservative with their portfolio.
A lot of people feel they need to get too conservative
as they get older. The question is do they want to earn
2 percent or 10 percent?
target date funds target age 65 for retirement because
thatís what the public is asking for," he said.
"The public consciousness is stuck at age 65
retirement, but they would be better off retiring at age
70. Their Social Security benefits would be higher, and
they would have five extra years of saving and five
extra years of not spending their wealth. The impact
over their remaining life would be huge."
a typical target date fund set for an age 65 retirement
date, the fund would have automatically adjusted to the
point where an individualís portfolio would have an
allocation of about 90 percent bonds and 10 percent
stocks ó at a time when bonds are paying near historic
low interest rates.
the popularity of target date funds in company
retirement plans shows no signs of slowing down.
on the latest data from U.S. investment companies, more
workers are using the "set-it-and-forget-it"
approach to retirement investing than ever before.
to the Washington, D.C.-based Investment Company
Institute, 76 percent of 401(k) plans included target
date funds in their investment lineup at the end of 2014
compared with 32 percent in 2006.
critics of this sweet and simple concept wonder how one
fund can really suit the needs of everyone who is
planning to retire in a given year.
I need $40,000 a year from my portfolio in retirement, I
can achieve that by taking out 4 percent a year in a $1
million portfolio. But what if I have only a $500,000
portfolio? I need to have an 8 percent return on
$500,000 to have the same income as someone with $1
million," said Paul Brahim, CEO of Pittsburgh-based
BPU Investment Management.
amount of money I have and the amount of money I need
are important components of my asset allocation
decision," he said. "If the target date fund
predetermines my asset allocation without knowing how
much money I have or how much I need, chances are they
could be wrong. I could wake up at age 65 and have the
wrong asset allocation based on my needs."
Puritz, managing director of Rebalance IRA, a national
low-cost wealth management firm based in Palo Alto,
Calif., said for many years the standard practice for
investing was to access accounts on the day of
retirement. For most people, this meant age 59 1/2 or
several years later at age 65.
that the general population is living much longer, this
model may be too conservative for most investors,"
said Puritz, whose company manages more than $470
million in client assets. "Investors should target
later in life and adjust to a growing life expectancy.
We advise that investors aim to take out funds at a
midpoint, such as mid-70s.
purpose of a retirement fund is to cover your whole
lifespan, not just the first few years after you
retire," he said. "Now the biggest risk
retirement savers face is not that the stock market will
drop, but that typical Americans will outlive their
noted, "Itís important to keep in mind that over
any 10-year period from 1928 to 2016, stocks have
outperformed bonds on average by over 6 percent per
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managers say more attention needs to be paid to what
target date funds do 30 to 40 years after retirement.
you retire, you donít die. You could pick a target
retirement age of 65 and then live another 15 to 30
years," said Ahmie Baum, managing director of the
Baum Consulting Group at UBS Financial Services in
Pittsburgh. "By picking a target date of age 65,
the investor is getting less risky with his investment
Baum said the trade-off would be that the investor could
end up living a few decades beyond retirement with less
inflation protection than he would get from owning more
stocks due to the heavy weighting of bonds, which pay
less yield, in the portfolio.
date funds make sense for individuals who want to
delegate the risk management and allocation of their
retirement account to a professional. But they should
keep in mind that their retirement savings need to last
person has a right number for themselves. There is no
perfect number for everyone," said Sean Pearson, a
financial adviser at Ameriprise in the Philadelphia
area. "We donít advocate targeting age 65 for
retirement. For a younger client, it might be a great
place to start.
gives them the impetus to save a lot for retirement, the
opportunity to retire early and the flexibility to make
changes if their family situation changes," he
said. "Setting an earlier retirement date forces
clients to save more earlier and that increases the
personal savings rate, which is the bigger factor."