Are you a “to” investor or a “through” investor?

If that makes no sense, don’t feel bad. It’s a subtle but important question concerning target-date funds, and whether the investor plans to withdraw everything when retirement begins or to draw money out gradually over decades.

Target-date funds have become a popular way to invest for retirement, eliminating a chief headache: having to adjust your mix of stocks, bonds and cash as you get older. You pick a fund with a date matching your expected retirement, and as the years go by the fund manager gradually shifts from a growth-oriented mix emphasizing stocks to a conservative one heavy on bonds.

The “to” funds aim to have the bulk of their assets in bonds and cash when the target date arrives, so the investor can withdraw everything without worry about the timing. An investor might do that to buy an immediate annuity to provide a guaranteed income, for example.

“Through” funds are meant to last throughout a 20- or 30-year retirement. To keep ahead of inflation, these funds maintain a larger allocation to stocks, making them riskier than the “to” funds.

Funds with a 2055 target date typically have 93% of their assets in stocks today, while those with a 2010 target date have 23% to 75% in stocks, depending on their “to” or “through” strategy, according to fund company T. Rowe Price (Stock Quote: TROW).

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Many target-fund investors where shocked by shrinking account values in the 2008 market plunge. Even 2010-dated funds lost money despite the nearness of the target date, because of their still-heavy stock allocations. That experience convinced many investors that the more conservative “to” strategy is better, T. Rowe Price says.

The firm tested that belief by studying how “to” and “through” portfolios would have done in the past. Each portfolio starts with a 90% allocation to stocks 40 years before retirement at age 65. The “to” portfolio steadily drops that allocation to 20% at the retirement date, then holds it steady. The “through” portfolio drops to 50% at the retirement date but takes another 30 years to decline to 20%.

With its heavier stock allocation, the “through” portfolio is obviously riskier, with larger up and down swings. But it served the investor better. In one example, for instance, the “through” investor had accumulated $1.37 million at age 65, while the “to” investor had $1.12 million, despite putting away the same amount. The gap got wider during the 30 years of retirement, showing that the “through” strategy, with its larger stock allocation, could provide a bigger retirement income.

In fact, the “through” strategy provided more income even if the two portfolios had the same value on the retirement date. That showed that an investor who emphasized stocks before retirement but switched to a very conservative strategy after retiring, rather than sticking with a large stock allocation, could suffer for it in later years.

The fact is that people who will live three or four decades in retirement need to keep a healthy stock allocation to reduce the risk of outliving their money.

You can shop for target-date funds at Remember that two funds with the same target date may have very different asset-allocation strategies, and you’ll have to look deeply into each fund’s prospectus to find the details.

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