Are Target-Date Funds Playing It Too Safe?

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Target-date funds have become a cornerstone of American retirement investing, with 71% of 401(k) participants invested in them, according to the Investment Company Institute. But as Americans live longer, some experts are questioning whether these funds become too conservative too soon.

Jessica Hall from MarketWatch explains:

• Target-date funds generally assume an investor’s time horizon ends around age 60 and shift heavily toward bonds. But someone retiring at 60 could live another 25 years or more. Reducing stock exposure too aggressively could sacrifice years of investment growth.
• Investors with longer investment horizons could benefit from staying much more heavily invested in stocks. MIT’s Robert Pozen estimates that $100,000 invested 90/10 in stocks and bonds could grow to $1.57 million over 30 years, versus $868,000 in a traditional 60/40 portfolio, assuming income is reinvested.
• That doesn’t mean target-date funds are a bad option. Their simplicity and built-in diversification make them a useful default, especially for inexperienced investors. But Hall argues they may be better used as a starting point rather than a lifelong, one-size-fits-all strategy.

Our take? Your retirement date and your investment horizon aren’t necessarily the same thing. As Americans live longer, a portfolio designed to get you to retirement may not be the portfolio you need to get you through it.

We’ve written about this issue in Diversifying Beyond Bonds in Retirement Planning, which looks at different portfolio approaches investors can take to balance growth and risk after retirement– especially as longer lifespans extend the investment horizon.