How the Pros Manage Your Money in Retirement

Target date funds offer a diversified portfolio designed for individuals who need their money for a specific retirement year - but how do they manage your cash after retirement?

Jeff Holt 28 July, 2015 | 11:35AM
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Target date funds help ensure that investors are kept on an appropriate path as their needs change through time. The concept is straightforward: Offer a suite of funds designed for individuals who need their money, usually for retirement, at or near a specific year in the future, and then offer a diversified portfolio that changes its asset allocation over time to become more conservative as the "target-date" approaches.

Target date funds may not address investors' unique retirement circumstances, but do-it-yourself investors may learn a thing or two by studying the moves of professionals.

Target date fund managers are tasked with designing a single, diversified strategy for investors who do not wish to make asset-allocation decisions. The managers proactively shift a fund's asset mix over time to address different phases of an investor's life cycle, including the retirement phase.      

Morningstar analysed target date funds in the US and created the Industry Average Sub-Asset-Class Glide Path which suggests the following five general asset-allocation guidelines for do-it-yourself investors.

Invest Amply in Bonds

Target-date funds in retirement, on average, hold more bonds than stocks. Bonds, including cash, make up 55% to 63% of the typical target-date portfolio for 65- to 75-year-old investors.

The allocation to the Core/Other Bond sub-asset class tops all others, accounting for roughly a third of assets. This position aims to protect investors' assets in the event of a sharp stock market decline. In the event there is a market crash, retirees' income withdrawals amplify losses as the withdrawals are taken out of capital, digging a deeper hole for assets to recover from. Some target-date series tilt toward bonds more than others.

Consider Holding Some Cash

Staying with the concern of preserving capital, target-date managers typically keep some cash on hand for retirees. A 65-year-old target-date investor holds a 7% cash stake on average. Even funds that do not carve out a dedicated allocation to cash within their strategic glide path tend to maintain some reserves.      

Don't Abandon Stocks

Volatility accompanies the expected higher returns of stocks, but target-date managers generally believe stocks play a valuable role in a retirement portfolio. According to the Industry Average Sub-Asset-Class Glide Path, a 65-year-old investor would still have 45% of his/her portfolio in stocks. Notably, some managers hold even more equities based on concerns that longer life expectancy increases investors' probability of outliving their retirement assets

Prepare for Inflation

Target-date managers often address inflation risk directly because of inflation's potential to ravage the purchasing power of retirees' assets. Real estate investment trusts and commodities are two sources to combat inflation.

Stay Diversified

What may be the biggest and most indisputable takeaway from the Industry Average Sub-Asset-Class Glide Path is that investors should continue to hold a diversified portfolio throughout retirement.

This applies to both the stock and bond allocations. Although U.S. stocks have surged higher than their international counterparts coming out of the financial crisis, non-U.S. stocks, including a sliver in emerging markets, still represent roughly 30% of the typical target-date glide path's overall equity exposure throughout the retirement phase.

This article has been edited from the original to ensure it is suitable for a UK investor audience

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Jeff Holt  is a Fund Analyst for Morningstar US