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).
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%.