That’s the human side of target date fund (TDF) glide paths – safety at retirement makes a big difference. Despite the subsequent recovery, 2008 was devastating to those in and near retirement at that time; the typical 2010 fund lost 25% in 2008. Reports show that most TDF participants withdraw their retirement savings so they did not enjoy the recovery unless they rolled over their savings into stocks, an unlikely choice in light of the 2008 debacle. Bear in mind that there was only a couple hundred $Billion in TDFs in 2008, whereas today the number is close to one $Trillion. The next 2008 will be substantially more devastating for TDF participants unless risk at the target date is significantly reduced from current levels.
Retirees cannot recover from investment losses the way they could while working. Their only course of action is to lower their standard of living, which takes an emotional and physical toll, as well as burdens our society which thankfully cares for its elderly.
So how safe is safe? The common practice is to increase bond exposure as the target date nears, but long term bonds are not safe in this economic environment. The right “Safe” is short term Treasure bills and Treasury Inflation-Protected Securities (TIPS). Note that this safety need not apply to retirement years. Rather it’s critical to the transition from working life to retirement. Choices in retirement can and should be unique and individualized. For example Pfau and Kitces argue for a U-shaped lifetime glide path, decreasing in risk through our working life and then increasing in retirement.
For more details, download our FREE eBook Understanding the Hidden Risks of Target Date Funds and our Infographic.