Target date retirement funds

Target-date retirement funds designate the approximate year that you think you will be leaving the work force, and fund managers will provide a preset portfolio, gradually increasing the proportion of bonds and cash as you age, while reducing stock fund holdings.

About $3.1 trillion was invested in them through October, according to data from the Investment Company Institute, a trade group for the mutual fund industry, and Morningstar, a financial research company. Many 401(k)s offer target-date funds. This type of investment has a Macro impact on the markets as well as a significant impact on the many investors who use them.

https://www.nytimes.com/2016/04/10/business/mutfund/target-d…

https://www.nytimes.com/2022/01/21/business/retirement-stock…

**How Much Stock Is Too Much in Retirement?**

**Stocks and bonds are core investments. Now, Vanguard is suggesting that retirees willing and able to bear the risk may want a stock target of 50 percent.**
**By Jeff Sommer, The New York Times, Jan. 21, 2022**

**...**
**Vanguard now says that some investors who have already entered retirement may be better off if they keep their stock holdings fairly high, retaining a 50 percent allocation to equities. The 50 percent stock retirement portfolio will be a new option available to companies with Vanguard target-date retirement funds in their plans. That is a big increase over the current allocation: just 30 percent stocks and 70 percent bonds....Vanguard’s target-date funds are actually a collection of low-cost, broad-based index funds, with holdings in a variety of domestic and international stocks and bonds. ...**

**But the greater risks associated with stock investing were also apparent. The biggest loss in any 12-month period for the fund with more stock was 28 percent, compared with 17 percent for the traditional income fund. ...Clearly, unless you are capable of withstanding the greater loss, you should not risk the 50 percent stock fund...**

**If market history tells us anything, it is that there will almost certainly be big shocks down the road.** [end quote]

Many METARs have more than 50% of their investable capital in stocks. (According to board polls.) Many of these stocks don’t pay dividends so they don’t add to cash flow. The stocks must be sold to free up cash, and the need may come during a market drawdown.

The RISK part of Macro Economic Trends and Risks should be emphasized at a time when the stock market and bond market bubbles are on the verge of being popped by rising interest rates.

Cash flow is king, during retirement as it is during the rest of life.

If your budget is well-covered by safe income (e.g. Social Security and bond interest, especially inflation-adjusted interest from I-Bonds), you can decide to speculate with stocks and take the RISK of loss of capital. Working people may have good cash flow from a salary, but a recession may cause job loss at the worst possible time – the same time as a stock market drop which will erode the value of the stocks you are counting on to sell when you need the money.

The target date retirement funds are tasked with creating stable and gradually growing Net Asset Values. They don’t include highly-volatile stocks like Tesla or SaaS companies that are more suitable for speculators.

https://investor.vanguard.com/investment-products/mutual-fun…
Vanguard also offers separate index funds with lower costs which can easily be combined to mimic the target-date funds. This is a bad time to be buying bond funds, since the NAV will drop as interest rates rise. Better to buy I-Bonds whose principal never drops.

While some METARs may choose to “set it and forget it” with target date retirement funds, the real reason for this post is to emphasize the risk that some have taken on without fully considering the true potential impact. If 50% stock is too high for a safe target retirement fund, it may be too high for a personally-managed portfolio.

Wendy

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While some METARs may choose to “set it and forget it” with target date retirement funds, the real reason for this post is to emphasize the risk that some have taken on without fully considering the true potential impact. If 50% stock is too high for a safe target retirement fund, it may be too high for a personally-managed portfolio.

One thing to keep in mind is that when the 50% drawdown occurs is more important than the drawdown itself, and it is even more important that the overall rate of return of the portfolio. If you are following the standard 4% WR from a balanced 60/40 portfolio, historically speaking a drawdown at the beginning of retirement could lead to a bust. But in later years your portfolio will likely be many multiples of the initial value, which means the drawdown is trivial.

The great Michael Kitces explains:

Simply put… the sustainability of portfolio withdrawals is driven far more by the sequence of returns that occur, than the actual long-term return itself. As investors earning long-term returns anywhere between 5.5% and 9.5% necessitated the “same” 4% safe withdrawal rate!

...Yet the reality remains that by withdrawing at “only” a 4% initial withdrawal rate, the overwhelming majority of the time retirees just finish with a massive excess amount of assets left over!

https://www.kitces.com/blog/url-upside-potential-sequence-of…

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My greatest fear is that I will need very expensive nursing home care at the end of life. The “risk” that I will have excess money left over after I die is more than balanced by the potential need for this money. (I do have Long Term Care Insurance but it’s likely to only cover part of the need.)

If only I could be sure that I would just drop dead neatly one day, I would do things differently.

Wendy

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WendyBG writes,

My greatest fear is that I will need very expensive nursing home care at the end of life. The “risk” that I will have excess money left over after I die is more than balanced by the potential need for this money. (I do have Long Term Care Insurance but it’s likely to only cover part of the need.)

If only I could be sure that I would just drop dead neatly one day, I would do things differently.

What I’ve leaned over the past 40 years is that if you “eliminate the skim” of financial advisors and high-fee insurance products like annuities and LTC insurance, it’s highly likely that you’ll have enough money to “buy the nursing home” when the time comes.

That’s the magic of the “4% rule” and long-term compounded investment returns.

intercst

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If only I could be sure that I would just drop dead neatly one day, I would do things differently.

Isn’t WA a right to die state? You are better off than many of us.

I have hospiced both my parents. Don’t want my kids doing that for me nor do I want to fade slowly with diminishing faculties.

IP

If only I could be sure that I would just drop dead neatly one day, I would do things differently.

That I understand - and agree with.

The unanswered question might be can expensive nursing care at end of life be simply declined? Or will family force it?

And I recall the courts have forced it in some instances.

I hope a better alternate exists, and I’m probably a lot closer than you are.

I understand in some states now one can have a right to death.

I’ve tried to make my wishes clear while I’m still clear headed. And talked with my physicians.

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“Better to buy I-Bonds whose principal never drops”


https://www.treasurydirect.gov/indiv/research/indepth/ibonds…

https://moneyfortherestofus.com/tips-and-ibonds/

https://districtcapitalmanagement.com/i-bonds/

I don’t think the return would be a good way to create a retirement fund all by its lonesome
but setting aside a portion of a “secure” bucket - not funds that you might need to access in
an emergency fund - is not a bad thought.

Howie52
Who recently sold off such bonds we had held for decades.

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Interesting post, especially as the market seems to be correcting. I am in my early 30’s and I was looking at 401k options recently. When I chose the target date option for when I am 60 years old, I noticed that ~30% of the portion would be allocated into cash and various bond funds. For someone who has appx. 30 years of work ahead (I enjoy my work) keeping that much money tied up in assets that really do not appreciate over time, I was shocked. Granted, it may help someone who is squeamish in the downturns, but it seems to me that so much growth is missed. I opted instead to spread it out for at least the next 15 years into 100% stock index funds (Small, Medium, Large Cap growth and value as well as some international). I’ll reassess when I am in my late 40’s and start to change the allocation then.

One other danger I’ve seen is that people will select a Target Date fund and the not allocate 100% of their capital to it. The concept only works when you have it all allocated into the same Target Date fund. Otherwise, your diversity is going to by way skewed depending on how the remaining capital is allocated.

Phaz

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WA State has such a law, which I voted for. It requires a person to be terminally ill and in full control of their mental abilities. I would certainly do this if I was terminally ill.

My concern is the high cost of assisted living in the absence of terminal illness.

Wendy

texirish: If only I could be sure that I would just drop dead neatly one day, I would do things differently.

That I understand - and agree with.

The unanswered question might be can expensive nursing care at end of life be simply declined? Or will family force it?

I understand in some states now one can have a right to death.

Who qualifies for euthanasia in Canada?

Be 18 years of age or older and have decision-making capacity. Have a grievous and irremediable condition* Have made a voluntary request for MAID that was not a result of external pressure.

We were in the middle of final touches on MAID (Medical Assistance In Dying) pre-booking under federal law when COVID took over the news … but managed to get the vast majority passed into law. I suspect keeping it out of the hands of states/provinces, extended family and churches is a very good thing?

Anymouse

https://www.dyingwithdignity.ca/get_the_facts_assisted_dying…

Get The Facts: Canada’s Medical Assistance In Dying Law

Learn more about Canada’s assisted dying law and what it means for your right to a peaceful death.
🛈 As of March 17, 2021, when Bill C-7 received Royal Assent, the law no longer requires a person’s natural death to be reasonably foreseeable to access medical assistance in dying (MAID).

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The target date retirement funds are tasked with creating stable and gradually growing Net Asset Values. They don’t include highly-volatile stocks like Tesla or SaaS companies that are more suitable for speculators.

Quibble: the stock portion of Vanguard target date funds use the Vanguard Total Stock Market Index Fund, and about 1.8% of that is in Tesla. It includes most of the Saas stocks too, but in tiny amounts. It’s 29% technology firms.

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The unanswered question might be can expensive nursing care at end of life be simply declined? Or will family force it?

Yep. My grandfather, may he RIP, became ill with various things, and as he declined, in a lucid moment he clearly requested to be “allowed to die”. But when push came to shove, some family members wouldn’t allow it, and instead flew him north in a medivac plane, and then put him on a ventilator for nearly half a year. And perversely, they turned his dining room into a virtual hospital-style room, where he languished until the end.

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I don’t think the return would be a good way to create a retirement fund all by its lonesome
but setting aside a portion of a “secure” bucket - not funds that you might need to access in
an emergency fund - is not a bad thought.

I agree. While I-bonds are not appropriate for the 40-45 years of growing the retirement savings, they may be appropriate for some of the emergency funds, and they may be appropriate for a portion of the fixed income allocation as you approach, and are in, retirement. I purchased I-bonds back 20 years ago when they had those delightful fixed rates attached, then I stopped buying for about 2 decades, and now I just started (2021/2022 so far) buying them again due to persistent negative yields in almost all other fixed income (zero real yield is better than negative real yield).

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