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.
**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.
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.