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These Tools Help You Hit The Mark With Target-Date Funds
I believe Target Date Funds could be used in a totally different manner than they are typically advertised which usually means these funds "target a retirement date".
I propose using these funds to provide a glide path of risk that "targets income needs in retirement" over future 5 year time periods.
Let's say I am 57 years of age in 2017 and I see a need for my investments to provide me an income of $X/month (adjusted for inflation) starting in three years (age 60).
So, a 2020 Target Date Fund would be funded with 5 years of spending (for age 60-64). So in 2020, I would begin disbursements from this 2020 fund and spend this fund down over the next 5 years (2020-2024). A Target Date Fund remains invested very conservatively after it reaches its target date which is perfect for spend down.
At age 57, I also would fund a 2025 Target Date Fund to begin disbursement in 2025 (from age 65-69).
I also would fund a 2030 Target Date Fund to disburse in 2030 (from age 70-74)
and so on...
Beyond the first 15 years I would then use 10 year increments such as, 2040 Fund for years 75-84 2050 Fund for years 85 - older
5 Funds all done.
For emergencies I might conservatively fund an additional 3-5 years of spending and replenish as needed.
All other resources could be aggressively invested without the worry of spending these resources at the wrong time (a bear market).
The beauty of a Target Date Funds is that they glide away from risk as they approach the spend down date (target date) and remains low risk during the 5 year spend down period.
Longer dated funds have time to deal with the risk/reward of the market serving as the inflation hedge.
From Ted's link:"The hypothetical employee in the study started working for $10,000 a year in 1975 and got annual raises equal to 1.5 percentage points above inflation. It seems to me that might be hard to ingest for the year(s) where cds were paying 15 - 16 %. What kind of raise would that work out to ?
@Bee : Did you post some thoughts on this glide path idea last year? I looked at doing something like this , but never pulled the trigger. After many bond beating years, this glide path may not work as well if interest rates keep rising !? Thanks for your thoughts. Derf
As I compared different T. Rowe Price Target Date Funds I noticed drawdown higher than I had expected. TRP Retirement Balance Fund (TRRIX) which is a conservative allocation fund doesn't even have the downside protection that VWINX has shown, nor does it out perform of the upside. PONDX does even better job as an income fund in both up and down markets.
At TRP a combination of PRWCX and RPSIX (or better yet PONDX) might actually perform better than these target date fund.
Comments
I propose using these funds to provide a glide path of risk that "targets income needs in retirement" over future 5 year time periods.
Let's say I am 57 years of age in 2017 and I see a need for my investments to provide me an income of $X/month (adjusted for inflation) starting in three years (age 60).
So, a 2020 Target Date Fund would be funded with 5 years of spending (for age 60-64). So in 2020, I would begin disbursements from this 2020 fund and spend this fund down over the next 5 years (2020-2024). A Target Date Fund remains invested very conservatively after it reaches its target date which is perfect for spend down.
At age 57, I also would fund a 2025 Target Date Fund to begin disbursement in 2025 (from age 65-69).
I also would fund a 2030 Target Date Fund to disburse in 2030 (from age 70-74)
and so on...
Beyond the first 15 years I would then use 10 year increments such as,
2040 Fund for years 75-84
2050 Fund for years 85 - older
5 Funds all done.
For emergencies I might conservatively fund an additional 3-5 years of spending and replenish as needed.
All other resources could be aggressively invested without the worry of spending these resources at the wrong time (a bear market).
The beauty of a Target Date Funds is that they glide away from risk as they approach the spend down date (target date) and remains low risk during the 5 year spend down period.
Longer dated funds have time to deal with the risk/reward of the market serving as the inflation hedge.
It seems to me that might be hard to ingest for the year(s) where cds were paying 15 - 16 %. What kind of raise would that work out to ?
@Bee : Did you post some thoughts on this glide path idea last year? I looked at doing something like this , but never pulled the trigger.
After many bond beating years, this glide path may not work as well if interest rates keep rising !?
Thanks for your thoughts.
Derf
I Probably did. Good memory.
As I compared different T. Rowe Price Target Date Funds I noticed drawdown higher than I had expected. TRP Retirement Balance Fund (TRRIX) which is a conservative allocation fund doesn't even have the downside protection that VWINX has shown, nor does it out perform of the upside. PONDX does even better job as an income fund in both up and down markets.
At TRP a combination of PRWCX and RPSIX (or better yet PONDX) might actually perform better than these target date fund.