While you were working, maybe you invested in a target date fund inside your 401(k). But as you near or enter into retirement, you might be wondering if you should hold on to the fund to keep things simple, or make a change.

Today we are going to discuss what you should know about target date funds so you can make a confident decision.

Are Target Date Funds A Good Investment for Retirement?

Resources:

• Click here to watch our video on, “Should You Rollover Your 401(k) to an IRA?”

Full transcript:

SPEAKERS

Alex Okugawa & Anthony Saffer

Anthony Saffer 0:00
Maybe you invested in a target date fund and your 401(K) or retirement plan. And now as you’re entering retirement or in retirement, you’re wondering, should I keep that target date fund? Or should I make a change?

Today, we’re going to discuss what you should know about target date funds, so that you can make a confident decision.

Hi there, it’s Anthony and Alex from One Degree Advisors, and we help you gain confidence in your retirement. So Alex, many people invest in target date funds within a 401(k) or retirement plan, especially at work. And as people stop saving, and they transition into retirement, that decision becomes should I hold on to this type of fun for simplicity? Or should I possibly consider a change?

Alex Okugawa 0:41
Yeah, and these target date funds are becoming more popular in 401(k) plans overall. And in general we’re a fan. I mean, the reason why is they’re relatively simple, and they’re usually pretty cost-effective. And the nice part is that these investments will get more conservative over time. So let’s just think about an example right, a target date fund of 2025. Essentially, what that fund is going to do is it’s going to assume that 2025 is your retirement date. And it’s going to get more conservative as the date of 2025 approaches. And again, this can be a really nice thing for folks keeping it really simple.

Anthony Saffer 1:18
Yeah, and with those target date funds, if somebody really doesn’t have access to high-quality financial advice to really look at that asset allocation that’s customized, this can be a great way that people will argue might be a little cookie cutter, but it certainly can do the job.

Alex Okugawa 1:30
And while simplicity is a benefit, it can also be a detriment in retirement. And the problem is especially amplified in bear markets. So again, let’s take a look at an example here, let’s use the previous example of a like a 2025 target date fund. In this example, I’m using a Vanguard fund. Now, overall, this target date fund is roughly 55% stocks, kind of like the growth portion. And then the other 45% is bonds and cash, your more conservative portion. And that’s as of February 2023. Now, again, what we’re looking at on this chart is a snapshot of 2022. And what we’re seeing is that the fund was down around 15 and a half percent through the end of the year. Now, total performance, I would say this is arguably to be expected for fun like this. So it’s not like it performed really poorly. This is what we would expect. The problem is, especially for a retiree, how are you going to create income?  What do we know about investing, that timeless adage, you want to buy low and sell high. Well, if I have all my investments in one, fund my stocks, which are my growth component, and my bonds and cash, which are my conservative component, and I need to go make cash, which means I need to sell some investments, I don’t have a choice of what to sell, I can only sell one fund and that fund while it’s down, that can be not such a good thing, especially when you’re in retirement,

Anthony Saffer 2:59
Yeah, when everything’s bundled up like that you don’t have a ton of flexibility. But there is a way to avoid that nasty situation. Let’s so let’s talk about solutions. The first is that you can create a custom plan.

Alex Okugawa 3:10
Yeah, and it doesn’t have to be overly complex. And the example we’re going to show folks is it’s not going to be complex. The key here is that it has to be intentional. And again, like I mentioned earlier, the problem with single funds that wrap up stocks and bonds and everything in there is you don’t have a lot of flexibility and choice. This is fine when you’re working. But once you retire, it’s especially important to give yourself flexibility, and optionality. So instead maybe we say let’s break out the stocks and the bonds. And we’ll use the same type of thing. I mean, you could do 55% stocks and 45% bonds and cash. A real simple example, is the green line folks are seeing there is just the ticker VT It’s kind of like the global stock market. And then the blue line is just short-term bonds as represented by the ticker, VGSH. Now, again, when you need the cash, where are you going to sell from? Are you going to sell from the green part that’s down 18% You’re going to sell from the blue part. And even in a really bad year, like we saw in 2022, or both stocks and bonds were down. This optionality allows you to sell from a position that wasn’t down so much, and it really helps create income.

Anthony Saffer 4:23
That’s right. So when somebody gets into retirement, it’s a different way of investing going from the accumulation stage to the income stage. And that’s really why we do preach having a more customized plan. Taking that very simple option. It doesn’t have to be complicated as far as creating that customization, but then you can add things that perhaps have commodities that did quite well in a year like last year, minimizing risk with such things as trend following in addition to your stocks and bonds, which may create the core. Now we did post a video most recently on why it might make sense to roll over or 401k to an IRA. We’ll go ahead and post that video so people can take a look at that as well. Again, this is Anthony at One Degree Advisors. Thanks for watching and if you’d like to learn more about how we can help you gain confidence in your retirement, please go to onedegreeadvisors.com/getstarted/.

Transcribed by https://otter.ai

The One Degree Blog

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This does not constitute an investment recommendation. Investing involves risk. Past performance is no guarantee of future results. Consult your financial advisor for what is appropriate for you. Disclosures: https://onedegreeadvisors.com/solutions/#disclosures