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Ron Surz, president of Target Date Solutions, a company that designs "smart" TDFs, has been sharply critical of conventional TDFs for years. “These funds with high concentrations in stocks are a time bomb,” Surz told Reuters
If I understand his strategy correctly he is recommending that investor's in TDF reallocate all accumulated contributions into safe assets 15 years prior to retirement date. So if your retirement date is age 70, then at age 55 one would separate out all accumulated contributions and place them into "safe assets". He doesn't explain what these "safe assets" are other than saying that they will not lose money. I assume the accumulated gains remain invested in the TDF.
My take: With this strategy, does one assume contributions made during the 15 year window (age 55 - age 70) also no longer get directed to the TDF? I am assuming they are being directed into "safe assets". I would worry about inflation risk over this 15 year time frame. Shifting the contribution component of your TDF 15 years prior to retirement seems excessively conservative to me as well during this 15 year period. Depending on the size of that accumulated contribution and its importance in supplementing retirement income I would shoot for funding a 5 year supplemental income bucket (safe assets...maybe laddered CDs or Treasuries).
Setting aside five years of safe assets seems appropriate. Creating this 5 year bucket during these 15 years before retirement would allow the portfolio to re-allocate during years when the portfolio had positive returns or excessive returns or growth in a dollar amount equal to 1/5 of the safe asset bucket or whatever criteria would sustain growth without compromising market opportunities.
These 5 years of safe assets could be accessed (withdrawn from the retirement account) to supplement other retirement income (SSI, pension, work or rental income, income from LT capital gains, etc.). In addition, It should be adequately funded to help the retiree meet inflation increases that are not built into their retirement income sources.
Keeping in mind that the first five years of retirement will have different supplemental needs than year six or year 16 or year 26, this 5 years supplemental income bucket will likely have a rolling balance that reflects the future 5 year rolling withdrawal needs throughout retirement.
Preparing to add to the 5 year bucket could start 10 years prior to the need. Again, market opportunities (positive volatility) could be maximized to help determine the timing of the funding. This would allow this reallocation to be laddered to mature when needed or be place in some other safe investment strategy.
This is the most useless thing I have read in some time:
... ask yourself if your TDF's risk level is right for you. Here are three questions to ask your 401(k) ... fund company: -- How much market risk are you taking within five years of your target or retirement age? If the stock mix is more than 70% in that timeframe, you could get nailed by a bear market. -- How much bond-market risk are you taking? Shifting most of your money into bonds near retirement is risky as well. .... Whatever you do, don't plug into these funds and forget about them.
Gawd.
@Bee's take above is thorough and thoughtful while Surz's is insanely conservative and seems to ignore recovery times of recent decades.
I will add this... for those invested in TDF and within 15 years of retirement:
Do some homework. Figure out your retirement income sources and your likely retirement budget.
Any shortfall will need to be made up by withdrawing from other investments. This should be considered "safe asset money".
Find some alternatives to even the most conservative TDF (TRRBX for example). Here are a few funds that I quickly compared to TRBBX (VWINX, PRSIX, and AONIX).
Looking at the 2007-2009 time frame is important in this comparison. Find other funds to compare and possibly decide on a few that would appropriate for your "safe asset money" Funds.
Remember volatility can be both negative and positive:
@bee, not sure if you know the difference between the TRP "Target Date" funds and the TRP "Retirement" Funds. My understanding is the target date funds reduce equity as they get closer to the stated date. The retirement funds keep the same equity bond distribution. For example the TRP 2020 target date fund (PAIRX) has 45% stocks. The 2020 retirement fund (TRRBX) you used in you chart is around 60% stocks.
I think your analysis and post was much better than the rather useless article though.
Getting a little deeper into the weeds...your ticker (PAIRX) is the advisor share class with a (.43) Expense ratio. TRRUX is the slimmed down ER version at (.18). My friend share class offered through John Hancock (plan administrator) has it's own ticker different from either PAIRX or TRRBX and I am now wondering if it is a TDF or a RF. I made the assumption they were one in the same. Hancock's version of TRRUX or TRRBX carries an ER closer to 1.18% vs 0.18% from TRPrice...so much for lower costs for investors.
TRPrice also offers a "Personal Strategy Income Fund", (PRSIX), which seems to be a pretty close slice of bread when compared to TRRUX. Is PRSIX the fund a retiree settles into once their TDF reached its target date or do they settle into a Retirement Fund?
Finally, For each coinciding Target Date Fund their is a Retirement Fund with a similar year designation offered at TRP. T.Rowe Price has Retirement Funds (2010, 2015, 2020, 2030, 2040, 2050) and Target Date Funds (2010, 2015, 2020, 2030, 2040, 2050)...I'm confused!
@bee, I also find it very confusing on TRP's side. The funds named "Retirement" are essentially asset allocation funds. I don't believe they change much if at all in equity/bond allocation. They should be called more appropriately '60:40 fund', or '50:50 fund' or '70:30 fund', whatever the allotment.
My 401k was with TRP for many years. I can remember them sending information a couple years ago when they decided to go the 'target date' and the 'retirement' funds as different style offerings. I don't remember the rationale .
Comments
targetdatesolutions.com/pdf-source/DeRisking-Target-Date-Funds.pdf
If I understand his strategy correctly he is recommending that investor's in TDF reallocate all accumulated contributions into safe assets 15 years prior to retirement date. So if your retirement date is age 70, then at age 55 one would separate out all accumulated contributions and place them into "safe assets". He doesn't explain what these "safe assets" are other than saying that they will not lose money. I assume the accumulated gains remain invested in the TDF.
My take:
With this strategy, does one assume contributions made during the 15 year window (age 55 - age 70) also no longer get directed to the TDF? I am assuming they are being directed into "safe assets". I would worry about inflation risk over this 15 year time frame. Shifting the contribution component of your TDF 15 years prior to retirement seems excessively conservative to me as well during this 15 year period. Depending on the size of that accumulated contribution and its importance in supplementing retirement income I would shoot for funding a 5 year supplemental income bucket (safe assets...maybe laddered CDs or Treasuries).
Setting aside five years of safe assets seems appropriate. Creating this 5 year bucket during these 15 years before retirement would allow the portfolio to re-allocate during years when the portfolio had positive returns or excessive returns or growth in a dollar amount equal to 1/5 of the safe asset bucket or whatever criteria would sustain growth without compromising market opportunities.
These 5 years of safe assets could be accessed (withdrawn from the retirement account) to supplement other retirement income (SSI, pension, work or rental income, income from LT capital gains, etc.). In addition, It should be adequately funded to help the retiree meet inflation increases that are not built into their retirement income sources.
Keeping in mind that the first five years of retirement will have different supplemental needs than year six or year 16 or year 26, this 5 years supplemental income bucket will likely have a rolling balance that reflects the future 5 year rolling withdrawal needs throughout retirement.
Preparing to add to the 5 year bucket could start 10 years prior to the need. Again, market opportunities (positive volatility) could be maximized to help determine the timing of the funding. This would allow this reallocation to be laddered to mature when needed or be place in some other safe investment strategy.
Your thoughts?
... ask yourself if your TDF's risk level is right for you. Here are three questions to ask your 401(k) ... fund company:
-- How much market risk are you taking within five years of your target or retirement age? If the stock mix is more than 70% in that timeframe, you could get nailed by a bear market.
-- How much bond-market risk are you taking? Shifting most of your money into bonds near retirement is risky as well. ....
Whatever you do, don't plug into these funds and forget about them.
Gawd.
@Bee's take above is thorough and thoughtful while Surz's is insanely conservative and seems to ignore recovery times of recent decades.
Do some homework. Figure out your retirement income sources and your likely retirement budget.
Any shortfall will need to be made up by withdrawing from other investments. This should be considered "safe asset money".
Find some alternatives to even the most conservative TDF (TRRBX for example). Here are a few funds that I quickly compared to TRBBX (VWINX, PRSIX, and AONIX).
Looking at the 2007-2009 time frame is important in this comparison. Find other funds to compare and possibly decide on a few that would appropriate for your "safe asset money" Funds.
Remember volatility can be both negative and positive:
I think your analysis and post was much better than the rather useless article though.
I have a 65 year old friend working and participating in a "mandatory 401K plan" through his employer.
Related IRS Reg change:
corporate.findlaw.com/corporate-governance/irs-approves-mandatory-401-k-contributions-if-appropriate.html
Getting a little deeper into the weeds...your ticker (PAIRX) is the advisor share class with a (.43) Expense ratio. TRRUX is the slimmed down ER version at (.18). My friend share class offered through John Hancock (plan administrator) has it's own ticker different from either PAIRX or TRRBX and I am now wondering if it is a TDF or a RF. I made the assumption they were one in the same. Hancock's version of TRRUX or TRRBX carries an ER closer to 1.18% vs 0.18% from TRPrice...so much for lower costs for investors.
TRPrice also offers a "Personal Strategy Income Fund", (PRSIX), which seems to be a pretty close slice of bread when compared to TRRUX. Is PRSIX the fund a retiree settles into once their TDF reached its target date or do they settle into a Retirement Fund?
Finally, For each coinciding Target Date Fund their is a Retirement Fund with a similar year designation offered at TRP. T.Rowe Price has Retirement Funds (2010, 2015, 2020, 2030, 2040, 2050) and Target Date Funds (2010, 2015, 2020, 2030, 2040, 2050)...I'm confused!
My 401k was with TRP for many years. I can remember them sending information a couple years ago when they decided to go the 'target date' and the 'retirement' funds as different style offerings. I don't remember the rationale .
See if this comes up:
https://www4.troweprice.com/iws/wps/wcm/connect/cb07f2804dc1463caf7dbf2f8c725be8/RetirementFunds_Glidepath_HardCard.pdf?MOD=AJPERES&CACHEID=cb07f2804dc1463caf7dbf2f8c725be8