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Target-Date Funds May Fall Short for Retirement Savers
Target-date funds, or what some call TDFs, have become the investment of choice for many folks saving for retirement. You buy one fund that is aligned with your anticipated year of retirement and you don't have to do much else.
"So what's needed instead? ... Well, it's something called target-income funds or TIFs. Those are funds that would provide investors with a specified level of income in retirement -- much like a defined benefit plan or an annuity."
There's already a product that provides investors a specified level of income much like an annuity. It's called an annuity. If this is what one really wants - a fixed, specified level of income that lasts a lifetime, no more, no less - one can already convert part of one's retirement savings into an immediate fixed annuity.
However, that might not be what one desires. If one wants an income stream that might grow with inflation and might leave something for heirs, and one is willing to take some risk with the variability of those payments and whether they will last a lifetime, there are managed payout funds, from providers like Vanguard, Fidelity, and Schwab.
"Savers know how much income they can expect to receive from Social Security and, if they have one, their defined-benefit plan. But that's not the case with a 401(k) plan which only tells the investor much money they've accumulated, and not how much income those assets will produce."
That's a matter of disclosure, not product design. If you like this idea, take a look at HR 2367, the Lifetime Disclosure Act.
Anytime I see “may” in a headline like this I’m wary of the actual substance of argument. But it’s a good read. TRP appears to offer a Target Income Fund. It appears quite new. Structurally, how would this differ from the target payout fund (VG and others) mentioned by @msf?
Interestingly, the NAV for TRLAX appears quite stable (for now anyway) at around $10. I assume that was the opening value. It’s also noteworthy they appear to target a 5% annual payout from the fund. I recently locked away my anticipated cash needs for 2020 (in the face of strong first-half market returns) and 5% pretty much covers the projected 2020 needs (in addition to SS and pension).
The fund’s “real” ER is around 1.2% , which sounds extraordinarily high for this type of fund. After a fee wavier, it’s .71%. That still seems high.
I can’t see where this would be any better than investing on your own conservatively within a sheltered plan and than withdrawing a predetermined amount yearly. I suspect you could do better on the ER and have more flexibility in the needed withdrawal amounts (which will likely vary from year to year). You also may / may not do somewhat better at timing the withdrawals to coincide with more favorable market conditions.
I don't keep up with the various offerings from all of the fund families (especially funds like these, being more of a DIY person myself), so I hadn't looked into TRLAX.
Viewing 4% as a "safe" withdrawal rate, that's what Vanguard targets. It adjusts the amounts periodically based on performance (as do virtually all managed payout funds). As @hank noted, T. Rowe Price fund targets 5%, while pointing out that it is designed to pay out more early in retirement and less later on (possibly not keeping up with inflation). That's not necessarily a bad idea; generally retirees are expected to spend more in early retirement while they are still more active.
You're not giving up flexibility with managed payout funds. As T. Rowe Price notes on the overview page, you have the "Freedom to withdraw additional funds", and to "Increase (or reduce) your monthly payouts ... by adding or removing investment assets."
The expense ratio does seem high, and is due to "other expenses", not management fees. I don't know why Price isn't operating more efficiently. In theory, you could mimic the fund yourself (it's a fund of funds), except that (a) you'd pay more than the 0.47% it pays for the aqcuired funds because you can't buy institutional class shares, and (b) some of the funds it uses are closed. Using retail class shares (if you could) would bring your expenses up to around 0.60%. (That's about the same as Fidelity charges for its 2020 RMD fund.)
Can one do better on one's own? Maybe. ISTM this question is not much different from asking: why invest in any allocation fund; can't one do better by investing one one's own in separate large cap, small cap, investment grade, junk bonds, international? Or would one do better by paying that same 0.71% and just buying PRWCX?
Comments
There's already a product that provides investors a specified level of income much like an annuity. It's called an annuity. If this is what one really wants - a fixed, specified level of income that lasts a lifetime, no more, no less - one can already convert part of one's retirement savings into an immediate fixed annuity.
However, that might not be what one desires. If one wants an income stream that might grow with inflation and might leave something for heirs, and one is willing to take some risk with the variability of those payments and whether they will last a lifetime, there are managed payout funds, from providers like Vanguard, Fidelity, and Schwab.
https://www.myretirementpaycheck.org/How-My-Paycheck-Works/Savings-and-Investments/Managed-Payout-Funds
https://humbledollar.com/money-guide/managed-payout-funds/
"Savers know how much income they can expect to receive from Social Security and, if they have one, their defined-benefit plan. But that's not the case with a 401(k) plan which only tells the investor much money they've accumulated, and not how much income those assets will produce."
That's a matter of disclosure, not product design. If you like this idea, take a look at HR 2367, the Lifetime Disclosure Act.
https://govtrackinsider.com/lifetime-income-disclosure-act-would-project-your-monthly-retirement-paycheck-based-on-your-4b976ee2e8db
https://www.actuary.org/sites/default/files/files/publications/Academy_Comments_LIDA_07062018.pdf
- Overview: https://www.troweprice.com/personal-investing/mutual-funds/target-date-funds/income-funds.html
- Detailed look: https://www.troweprice.com/personal-investing/tools/fund-research/TRLAX
Interestingly, the NAV for TRLAX appears quite stable (for now anyway) at around $10. I assume that was the opening value. It’s also noteworthy they appear to target a 5% annual payout from the fund. I recently locked away my anticipated cash needs for 2020 (in the face of strong first-half market returns) and 5% pretty much covers the projected 2020 needs (in addition to SS and pension).
The fund’s “real” ER is around 1.2% , which sounds extraordinarily high for this type of fund. After a fee wavier, it’s .71%. That still seems high.
I can’t see where this would be any better than investing on your own conservatively within a sheltered plan and than withdrawing a predetermined amount yearly. I suspect you could do better on the ER and have more flexibility in the needed withdrawal amounts (which will likely vary from year to year). You also may / may not do somewhat better at timing the withdrawals to coincide with more favorable market conditions.
Thanks for the link, Derf
Apparently T. Rowe Price rebooted the fund two years ago, changing it from a target date fund into a managed payout fund. So the short answer is that this fund isn't much different from other managed payout funds now, but it used to be.
https://retirementincomejournal.com/article/t-rowe-price-reopens-the-market-for-payout-funds/
Viewing 4% as a "safe" withdrawal rate, that's what Vanguard targets. It adjusts the amounts periodically based on performance (as do virtually all managed payout funds). As @hank noted, T. Rowe Price fund targets 5%, while pointing out that it is designed to pay out more early in retirement and less later on (possibly not keeping up with inflation). That's not necessarily a bad idea; generally retirees are expected to spend more in early retirement while they are still more active.
You're not giving up flexibility with managed payout funds. As T. Rowe Price notes on the overview page, you have the "Freedom to withdraw additional funds", and to "Increase (or reduce) your monthly payouts ... by adding or removing investment assets."
The expense ratio does seem high, and is due to "other expenses", not management fees. I don't know why Price isn't operating more efficiently. In theory, you could mimic the fund yourself (it's a fund of funds), except that (a) you'd pay more than the 0.47% it pays for the aqcuired funds because you can't buy institutional class shares, and (b) some of the funds it uses are closed. Using retail class shares (if you could) would bring your expenses up to around 0.60%. (That's about the same as Fidelity charges for its 2020 RMD fund.)
Can one do better on one's own? Maybe. ISTM this question is not much different from asking: why invest in any allocation fund; can't one do better by investing one one's own in separate large cap, small cap, investment grade, junk bonds, international? Or would one do better by paying that same 0.71% and just buying PRWCX?