Markets, Financial Planning, Retirement

Why Target-Date Funds Are Right For Some Investors

9/6/17 8:00 AM

iStock_000018447826_Small-1-1.jpgStock market volatility has picked up recently and some of the large intraday selloffs might have brought back memories of the financial crisis for many investors. This is especially true for any older Americans that were among the most adversely affected by the market turmoil that followed the bursting of the housing bubble. Indeed, an Allianz Life study found that two-thirds of surveyed Gen-X and Baby Boomer Americans reported that they still feel the effects of the financial crisis on how they live, work, save, and spend.

This has resulted in a rather dour outlook for America’s retirement landscape, with an overwhelming 92 percent (84 percent) of Boomer (Gen-X) respondents believing that there is a “crisis,” and only 16 percent from both groups feeling confident that they will be able to achieve their desired standard of living in retirement. Such sentiment is in part due to the fact that even though all investors likely saw their assets take a big hit during the financial crisis, the large market drawdown put older adults in the most precarious situation given their relative proximity to retirement.

For example, the blow to their savings might have forced many of them to postpone retirement and/or significantly reduce their portfolio risk tolerance, e.g. panic selling at the least-opportune time (market bottom). The latter might have been avoidable for individuals that were utilizing the various alternative investment products that can help free investors from most of the complicated portfolio management decisions. A target-date fund (TDF), for instance, is a hybrid mutual fund that automatically adjusts the asset mix of stocks, bonds, and cash equivalents in its portfolio so that the holdings are more appropriate for an investor’s nearness to retirement.

This automatic rebalancing feature of TDFs is why they have become quite popular in recent years, especially with 401(k) investors that do not want to have to worry about making routine, age-related portfolio adjustments. Of course, TDFs are far from perfect because they do not take into account an individual’s risk tolerance and net worth but target-risk funds and other alternatives are available. As a result, it may be beneficial for retirement investors to consult with a professional financial advisor for help in determining what trading instrument is most appropriate for their unique situation.

 


 

Sources: Allianz Life

Post author: Charles Couch