Money & Policy

How Risky Are Your Retirement Funds?

Ways to find the right investment mix for your nest egg

(This article appeared previously on MarketWatch.com.)

Quick question: Are you saving “to” retirement – or “through” retirement?

The answer could help you determine the best investment mix for your nest egg and shed some light on your comfort level with risk. And if your retirement portfolio relies heavily on target-date mutual funds (which combine stocks, bonds and other investments and adjust the allocations based on age or time to retirement) or similarly structured investments, it’s that much more important to understand the distinction.

To vs. Through

Writing for The Wall Street Journal, Tom Lauricella explained how these dueling strategies for retirement funds work. The “to” approach refers to preserving savings for a particular retirement date: say, your 65th birthday. The objective is to get “to” that date without 11th-hour harm to your nest egg. Such investors and retirement funds typically reduce their holdings in riskier investments — namely, stocks — in the years prior to retiring, even if doing so limits the potential for growth.

(MORE: 3 Questions to Answer Before You Retire)

By contrast, investors and retirement funds who favor a “through” approach attempt to increase their savings well into, or “through,” retirement. As such, they allocate a good portion of their holdings to stocks and other riskier investments, despite a bigger risk of losses.

What's the Best Mix?

So is there an optimal mix?

That’s the “great debate,” says Catherine Gordon, a principal in Vanguard Group’s investment-strategy unit. Finding the right glide path — a changing mix of stocks and bonds over time — is a differentiating factor among target-date funds.

(MORE: Create Your Own Target-Date Fund)

For instance, BlackRock’s target-date funds aim to reduce stock holdings from 59 percent of a portfolio 10 years before retirement to 51 percent five years before retirement and then all the way down to 38 percent at retirement. Meanwhile, bond and cash holdings increase.

Wells Fargo Advantage Funds take a similar approach, with stocks at just 28 percent of the firm’s target-date funds at retirement, says James Lauder, co-portfolio manager. “When you’re near retirement, you just can’t stand large losses,” he notes.

More Stocks in Retirement

On the other side of the fence, in the “through” camp, is Vanguard Group, among others. At retirement, Vanguard’s target-date funds hold 50 percent in stocks; it isn’t until seven years into retirement that stocks fall to 30 percent of a portfolio.

(MORE: Is Too Much of Your Retirement Money In Stocks?)

Vanguard’s Gordon says the firm’s client research indicates that most individuals don’t cash out of their investments at retirement. Instead, they tend to keep their money in their 401(k) plan or Individual Retirement Account until after age 70.

Still, Gordon says, the losses in the 2007-09 bear market show the importance of retirees taking a hard look at the kind of portfolio declines they can stomach. “Sadly, we have 2008 for people to look at and say, ‘What would that do to my ability to support my lifestyle and my family?’” he adds.

Glenn Ruffenach edits The Wall Street Journal’s guide to planning and living the new retirement. Reach him at encore@wsj.com.

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