Have a Target Date Fund retirement account? You still need to plan.
If you participate in a company-sponsored retirement saving plan, you very likely own a Target Date Fund (TDF). Based on the date you plan to retire, a TDF will own a mix of U.S. stocks, foreign stocks, U.S. bonds, foreign bonds and cash. The exact mix of investments varies based on the company building the fund, but they all follow generally accepted asset allocation principles. You will own more stocks when you are younger and more bonds and cash as you near your target retirement date.
How do Target Date Funds work?
According to Morningstar, total assets in target-date funds exceeded $1.1 trillion in 2017. Most plans offer at least one TDF option and in many cases the TDF fund based on your expected retirement year is the default investment selection if you make no specific investment selection.
The largest providers of target-date funds are:
- Vanguard
- Fidelity
- T. Rowe Price
One of the advantages of a TDF is that it gives you a range of investments in one package.
However, one problem with TDFs is that they assume you will begin distributions on a certain date. If there’s a market correction around that date, the amount of stock exposure may be too high to avoid serious loss of principal.
That’s why it’s a bad idea to put your retirement money in a TDF and then do nothing until after you retire. This is one reason I counsel everybody to plan for retirement in advance of their retirement date.
Retirement Red Zone
Generally, I recommend that clients in the Retirement Red Zone (the five years prior and the five years after the retirement date) to create a holistic retirement plan. This approach clarifies what you want to do in retirement and what resources you will need to do it. One aspect of the plan is to create a retirement income plan that uses a bucket strategy to provide steady income and protect the long-term value of your retirement savings. The primary idea is to calculate the amount of the distribution you will need in your first year of retirement, before you get there.
In simplified terms, the bucket strategy moves money into separate buckets based on the year you plan to use the money. On retirement day your retirement income fund looks like this:
- Year One income is held in a money market account.
- Year Two income is held in short-term bonds.
- Year Three income is held in intermediate-term bonds.
- Years Four to Eight income is held in a balanced fund owning equal parts stocks and bonds.
- The rest of the retirement nest egg can be in a diversified stock portfolio.
This fund is constantly monitored and routinely rebalanced to maintain three years of income in the stable investments described above.
How a financial planner can help
If it sounds just a bit complicated, you’re right. It’s a great idea to talk with a professional as you enter the Retirement Red Zone to be sure you have a good plan for your situation. A trained, skilled and experienced financial planner will give you great insight into your situation and how to create a plan that will meet your goals.
A great place to look for an experienced financial planner is to talk with a couple CERTIFIED FINANCIAL PLANNER™ professionals.
To find a CFP® professional near you, start your search here.
As you visit with financial planners, I suggest a couple things to check:
- Is the advisor always the client’s advocate – a fiduciary advisor?
- Is the advisor only paid by clients, not any financial product manufacturer or distribution network? That would be a fee-only advisor.
These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.
A fiduciary, fee-only, CFP® professional can help you make great retirement income choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.
Yes, I am a CFP® professional. I’m always a fiduciary and I only work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you thinking about your own circumstances, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.