Near-retirees who have turned to target-date funds to build savings 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 bear market territory. Bonds are also plummeting, with the 10-year Treasury yield rising as much as 3.48% on Tuesday, a level last seen in 2011. Bond prices move inversely to yields. There is likely to be more pain and volatility ahead 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 take the guesswork out of investing and gradually reduce risk as savers get closer to their retirement date. But even many near-dated funds, including those with a 2025 retirement date, are seeing double-digit declines this year, as stock and bond prices fall. “Existing bond portfolios can be hit very hard by the Fed raising rates, so it’s not de-risking people as much as you might think,” said Jamie Hopkins, managing partner at Wealth Solutions. of Carson. In fact, bond portfolios in target date funds have durations of 6 ½ to 7 years, which can expose older workers to sell-offs in the bond market as they near retirement, according to Jared Woodard , investment strategist and ETF at Bank of America. “Stock-bond correlations have turned positive, challenging the assumption that bonds will always effectively hedge stocks,” he wrote in a report earlier this month. Adjust allocations Fund families typically make small changes to their allocation each year, but a couple of companies announced updates to their fixed-income envelopes ahead of the 2022 bond market ravages, according to Megan Pacholok, a managers’ research analyst from Morningstar. For example, BlackRock has based the fixed income portion of its LifePath funds on the Bloomberg Barclays Aggregate Bond Index. Last October, the firm announced that it would split the aggregate index into its components — US Treasuries of different durations, corporate bonds, and securitized assets — and weight them based on where investors are in their lifecycle. . Older investors invest more in government securities, according to Nick Nefouse, head of LifePath at BlackRock. The company’s 2025 LifePath Index Fund is down about 16% for the year, but small allocations into different assets, such as commodities and real estate mutual funds, have helped soften the blow. “They offer some level of coverage to offset some of that risk,” Nefouse said. “Commodities are very sensitive to inflation and you get a hit in a market like this.” Meanwhile, Fidelity Investments added to its Freedom Funds allocation toward inflation-protected Treasuries, particularly for savers nearing retirement and those who have already reached their target date. The 2025 harvest of the funds is down 21% this year. The move helps savers deal with inflation stress, said Sarah O’Toole, institutional portfolio manager at Fidelity. “The sources of uncertainty are really limitless, as we’ve seen in recent years,” she said. “The best tool we have to manage that is diversification.” Managing a bumpy ride Investors who have taken a “set it and forget it” attitude toward saving for retirement may need to change tack if they’re close to their target date and facing steep declines. Here are some starting points. Know what you have: Although all target date funds have a “slip path” that generally becomes more conservative until the target date, some funds maintain significant exposure to stocks at the withdrawal date and beyond. Higher exposure to equities gives you the opportunity to keep up with inflation, but can also carry some volatility risk. Adapt a hands-on mindset for retirement spending: “The mindset has to shift from investing allocation to spending,” Hopkins said. This might mean working with a financial advisor to develop a strategy for not only investing your savings, but also using it sustainably. “If you were someone who’s been in a target date fund, you might enjoy using a needs-wants-wants bundling approach,” she said. Resist the urge to bail out. A losing streak for both equities and fixed income is painful for investors, but fleeing the market now means cashing in when losses are worst. “When the market gets a little choppier, it can be scary,” Pacholok said. “You may want to fold, but then you lose the rebounds.”
Retirement funds are taking a hit in 2022. How investors can cope
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