Near-retirees who have turned to target date funds to build their nest egg may want to rethink their retirement planning as stocks and bonds face steep declines. The S&P 500, down about 23% in 2022, is in bearish territory. Bonds are also taking their place, with the 10-year Treasury yield hitting 3.48% on Tuesday – a level last seen in 2011. Bond prices move inversely to yields. More pain and volatility is likely for both sides of the portfolio as the Federal Reserve continues its interest rate hike campaign. Target date funds, a staple of 401(k) plans, aim to eliminate investment assumptions and gradually reduce risk as savers approach their retirement date. But even many near-maturity funds — including those with a retirement date of 2025 — are seeing double-digit declines this year, as stock and bond prices fall. “Existing bond portfolios can be hit hard by the Fed’s rate hike, so it doesn’t reduce risk as much as you might think,” said Jamie Hopkins, managing partner of wealth management solutions at Carson. This is because target-maturity fund bond portfolios range in duration from 6.5 to 7 years, which can expose older workers to a sell-off in the bond market as they approach retirement, according to Jared Woodard, investment and ETF strategist at Bank of America. “Correlations between bonds and equities have turned positive, challenging the assumption that bonds will always effectively hedge equities,” he wrote in a report earlier this month. Adjust allocations Fund families typically make small changes to their allocation each year, but a few companies announced updates to their fixed income sleeves ahead of the bond market havoc of 2022, according to Megan Pacholok, analyst, Research on managers at Morningstar. For example, BlackRock has based the bond portion of its LifePath funds on the Bloomberg Barclays Aggregate Bond Index. Last October, the company announced that it would break down the aggregate index into its components – US Treasuries of varying durations, corporate bonds and securitized assets – and weight them according to where investors are in their life. Older investors are more heavily invested in government securities, according to Nick Nefouse, head of LifePath at BlackRock. The company’s LifePath Index 2025 fund is down about 16% for the year, but small allocations to different assets — such as commodities and real estate investment trusts — helped soften the blow. “They offer some level of coverage to offset some of that risk,” Nefouse said. “Commodities are so sensitive to inflation, and you have an impact in a market like this.” Meanwhile, Fidelity Investments has added to its Freedom Funds allocation to Treasury inflation-protected securities, particularly for savers approaching retirement and those who have already reached their target date. The fund’s 2025 vintage is down around 21% this year. The move helps savers weather inflationary stress, said Sarah O’Toole, institutional portfolio manager at Fidelity. “The sources of uncertainty are truly limitless, as we’ve seen in recent years,” she said. “The best tool we have to manage this is diversification.” Managing a bumpy ride Investors who have adopted a “set it and forget it” attitude to retirement savings may need to change course if they approach their target date and face challenges. steep declines. Here are some starting points. Know what you’ve got: While all maturity funds have a “glide path” that generally becomes more conservative until the target date, some funds retain significant equity exposure at the retirement date and beyond. Greater equity exposure gives you the ability to track inflation, but it can also come with some volatility risk. Adopt a practical mindset for retirement spending: “The mindset needs to shift from investment allocation to spending,” Hopkins says. This could mean working with a financial advisor to develop a strategy not only to invest your savings, but also to tap into them in a sustainable way. “If you were someone who participated in a target date fund, you might appreciate using a needs, wants, and wants grouping approach,” he says. Resist the urge to bail out. A tough time for stocks and fixed income is painful for investors, but fleeing the market now means cashing in when losses are at their worst. “When the market gets a little bumpier, it can be scary,” Pacholok said. “You might want to make some takedowns, but then you miss the rebounds.”
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