NEW YORK (Reuters) - If you are close to retirement in the United States, chances are you do not have to worry about cashing out of the market as it gyrates wildly on coronavirus fears.
Many retirement savers own target-date funds, which are professionally managed to glide over time from stocks to bonds and other fixed income, starting about 20 years out from the projected date you will stop working.
According to Morningstar, investors had more than $1.7 trillion in target-date funds at the end of 2018.
For those approaching retirement, it is likely that your portfolio is approaching a 50/50 mix, and it will systematically ratchet back even further away from stocks as you age.
Vanguard’s 2025 fund, for instance, is currently at 60 percent equities and 40 percent bonds and other fixed income; its 2020 fund is at 50/50. In February, while the MSCI U.S. index lost 7.43% for the month, the 2025 fund dropped 3.98%, and the 2020 fund fell 3.22%.
Vanguard’s senior investment strategist, Scott Donaldson, said 77% of the company’s participants use target-date funds. Just over half of those participants are in a single target-date fund.
Target-date usage will become even more prevalent over time because so many younger workers are automatically invested in target-date funds - to the tune of 90% of those under 25, compared with just 50% for those aged 55 to 64, according to Vanguard.
Fidelity, another giant in the retirement market, says about 76% of its savers use target-date funds.
By contrast, just 7.5% of Fidelity’s do-it-yourself investors aged 60-64 are 100% allocated to equities, while 4.9% are totally out of stocks. The typical mix for that age group is 66% equities and 34% non-equities, as of the end of 2019, Fidelity said.
“We do check-ins with people periodically,” said Katie Taylor, vice president of thought leadership at Fidelity. “Sometimes people just need to be reassured, especially if they don’t follow the markets day-to-day.”
ON YOUR OWN
If you are managing your own allocations, with or without an adviser, the key to surviving market turmoil is to have a long-term plan and stick with it. You need to balance safety with the need for returns that beat inflation.
For certified financial planner Tim Doehrmann, whose practice is in Morton, Illinois, that process starts as soon as he meets new clients and talks to them about their risk tolerance. When the conversation turns to asset allocation, Doehrmann prefers to talk about time rather than percentages.
A key consideration is how much Doehrmann’s clients are willing to withdraw from fixed income while waiting for the market to recover.
Doehrmann gives the example of this client couple: Both are 70 and have $2 million in investable assets. For them to be able to draw $95,000 a year from investments, on top of approximately $45,000 in Social Security, he suggests setting aside about six years of a portfolio in fixed income like bonds, which is about $600,000, or about 30%.
Lisa Kirchenbauer, a certified financial planner in Arlington, Virginia, takes more of a bucket and goals-based approach. A few years ahead of retirement, Kirchenbauer’s clients will estimate their needs, especially the required minimum distributions they need to take from their accounts. Each year, they set that aside in cash so it is ready to go.
“We don’t have to sell in a down market that way,” Kirchenbauer said.
For a reality check, go ahead and take a peek at your accounts. “Even if you are 60, I’m not so worried about that, because your full retirement age is 67,” Kirchenbauer added. “You have at least five years, and you can hang in there.”