On this episode of Retirement Starts Today, we’ll discuss the pros and cons of target date funds as well as Vanguard’s managed payout fund. You’ll learn exactly what a target date fund is and why they are the preferred vehicle of the majority of 401K savers. We’ll discuss an Investment News article that warns of the dangers the target date funds and we’ll answer a listener’s question about whether she should use a managed payout fund to provide an income stream in retirement. Are you ready to arm yourself with the knowledge to help you navigate the unknown of retirement? Then listen in to hear the latest retirement news and listener questions.Are you ready to arm yourself with the knowledge to help you navigate the unknown of #retirement? Then listen in to hear the latest retirement news and listener questions. Click To Tweet
Outline of This Episode
- [1:22] What is a target date fund?
- [3:19] What are target date funds strengths and weaknesses?
- [9:09] A U-shaped glide path has its benefits
- [13:11] Is Vanguard’s managed payout fund a good vehicle to provide monthly income in retirement?
What is a target date fund?
First off, let’s clear up any confusion and define what a target date fund is. A target date fund is also known as a life cycle fund. If you look at your 401K statement you’ll see years listed in 5-year increments like 2020, 2025, 2030, etc. These are the target dates for your retirement. This allows you to choose the target date for you to retire. Choosing a retirement date will shift the balance of your fund from a stock-heavy portfolio to a more balanced portfolio between stocks and bonds. So if you are quite young you will have a portfolio that contains mostly stocks but the closer you get to retirement the target date fund will have more bonds.A benefit of target date funds is that it allows you to set it and forget it. Click To Tweet
What are the pros and cons of target date funds?
Set it and forget it!
The target date fund automates the prudent idea that investors should ease away from a stock-heavy portfolio earlier in life to a more balanced portfolio as the investor approaches retirement. Each 401K provider can vary in their target date fund offering. I love them for accumulation planning as long as they are low cost. With target-date funds, you set it and forget it. You’ll never have to worry about fund rebalancing. You also don’t have to worry about having stale funds or funds that were bought out by other funds lying around in your portfolio. It will average you out of stocks slowly and make sure you aren’t investing too aggressively.
What are the hidden dangers of target date funds?
According to the Investment News article, target date funds are the preferred investment vehicle for the majority of 401K savers and they are becoming ever more popular. The real problem with target date funds lies in what to do with the stocks after retirement. A better approach, according to Investment News, would be to grow equity exposure in retirement rather than maintain it or decrease it. So, once you get down to 50% stocks you should then increase in what is called a rising equity glide path. This is a U-shaped glide path has a double benefit when compared to other approaches. It reduces the probability of running out of money in retirement and reduces the magnitude of a shortfall if the client does run short. What this is trying to accomplish is to get the equity to outpace inflation. You’ll also need less toward the end of retirement since you will have probably slowed down quite a bit and likely only have about 10 years ahead of you.The 4% safe withdrawal rate can be confused with a managed payout fund of 4%. Learn why you should not confuse the 2 on this episode of #RetirementStartsToday. Click To Tweet
Is Vanguard’s managed payout fund a good option for providing monthly income in retirement?
A listener is wondering how to structure her income in retirement. She is considering using Vanguard’s managed payout fund. The goal of a managed payout fund is to target a payout of 4% each year. This shouldn’t be confused with the 4% safe withdrawal rate in which many people base their retirement withdrawals. The managed payout fund doesn’t grow with inflation, whereas your withdrawal rate will and is really only 4% that first year. The managed payout fund is an extremely conservative approach. There are other options to consider when structuring your retirement income.
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