Stock Investing in retirement for those who are able to take the risk
Look under the hood, however, and you’ll find that Vanguard’s target date funds are actually a collection of low-cost, broad-based index funds, with holdings in a variety of domestic and international stocks and bonds. . For larger business plans, these investments are not mutual funds but, technically, group index trusts, which are generally less expensive than mutual funds, with prices negotiated with individual companies. (For example, the standard Vanguard Target Retirement 2030 fund has an expense ratio of 0.14%, which Vanguard will lower to around 0.08% in February. This compares to 0.065% expense for the equivalent offering in the New York Times 401(k) plans.)
Until now, you could ignore the strategies that were feeding the funds. All you had to do was decide which target date fund best matched your likely retirement date – they’re arranged in five-year increments, ranging, for now, from 2015 to 2065, with the 2070 fund emerging under bit – and Vanguard would make adjustments for you as you approach retirement. The Vanguard Target Retirement 2065 fund, for example, is more than 90% stocks and less than 10% bonds.
The funds reach a 50% equity allocation on the designated target date, say 2030, and over seven years the allocation decreases until it reaches 30% in the Vanguard Target Retirement Income Fund for retired investors . This is the current configuration, which will continue to be the default configuration in artboards.
But this year, Vanguard is launching a new fund, the Vanguard Target Retirement Income and Growth Trust. On the target date, a retiree’s investments would go into that fund, which will never drop its equity ratio below 50%, said Nathan Zahm, head of goals-based investing research at Vanguard, in an interview. “This fund is suitable for certain people, those who can handle more risk and can afford to do so,” he said. “But people will have to think about it carefully.”
The company’s research shows how the two different stock allocations would have affected a retiree with a $1 million portfolio from 1990 to 2020, based on the performance of the markets tracked by the indices represented in the current range of funds. from Vanguard. The 50% equity fund would have had annualized returns of 7.3% versus 6.6% for the 30% equity fund. This equates to an additional $7,000 each year for the fund with more equity, which the retiree could have spent or salted.
But the greatest risks associated with investing in stocks were also apparent. The biggest loss over a 12-month period for the fund with more stocks was 28%, compared to 17% for the traditional income fund. If these declines occurred in the first year of investment, the $1 million portfolio would have suffered a whopping $280,000 loss, compared to a $170,000 decline for the bond fund. Obviously, unless you can handle the biggest loss, you shouldn’t risk the stock fund by 50%.
It’s easy to envision large equity investments when the market has been rising for years. But if you have to stop working just when the stock market is falling – which happened to many people in 2008, when the S&P 500 fell more than 38% – target retirement funds will generate painful losses with the one or the other allocation.