This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Are Target-Date Retirement Funds Doing Things Backward?

NEW YORK ( TheStreet) -- Financial advisers have long preached a cardinal rule: As you get older, shift your portfolio to more conservative assets.

The approach has influenced target-date mutual funds, which are used by millions of retirement investors. Using a typical target-date portfolio, a person in his 20s starts with an aggressive portfolio that has 80% of assets in risky stocks and 20% in safe bonds.

Over the years, the stock allocation declines gradually, following what is called a glide path. By the time the retiree reaches his 80s, the portfolio might have 20% in stocks and 80% in bonds.

The approach has satisfied many savers. But now some advisers are challenging the old dogma. The critics say that instead of reducing stock holdings, you should keep a static allocation, perhaps holding 50% of your assets in stocks for decades.

Some studies suggest that you would do better by starting with a low equity allocation and gradually raising it. So far, the critics have gained few followers. But their provocative studies present a challenge to traditional thinking.

Among the most compelling critics is Michael Kitces, research director of Pinnacle Advisory Group, a wealth-management firm. Kitces says that the greatest threat to a nest egg can occur when the market tanks just as a saver is beginning to take retirement withdrawals. If that happens, assets can be quickly exhausted.

Downturns that happen near the end of the retirement would not necessarily cause the saver to go broke. Kitces says that standard glide paths don't provide the best protection against crucial losses in the early years.

To understand his point, consider a hypothetical saver who retired in 2008 when many portfolios lost 40%. The saver started with 60% of assets in stocks and gradually lowered the allocation to 30% in the next 30 years.

If we assume that the market would deliver historic returns, the saver would likely have done better to move in the reverse direction, starting with 30% in stocks and gradually shifting to 60%.

The big allocation to bonds in the early years would have protected the portfolio during the downturn of 2008. Odds are good that subsequent rallies would benefit the portfolio as it gradually increased equity holdings.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $95.01 0.00%
FB $99.75 0.00%
GOOG $682.74 0.00%
TSLA $147.99 0.00%
YHOO $27.05 0.00%


Chart of I:DJI
DOW 16,027.05 -177.92 -1.10%
S&P 500 1,853.44 -26.61 -1.42%
NASDAQ 4,283.7530 -79.3910 -1.82%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs