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They say age is just a number. When it comes to how conservative or aggressive you should be inside your investments, I fully agree!
This may be because many retirees believe their age should dictate their investment mix.
While there may be some truth to this, age isn’t the distinguishing factor, but rather, timing and when you need the funds. Sometimes, that is age. But for retirees across the board, since retirement is by no means the same thing across the board, your allocation mix should also (potentially) be different. If not, it can cost you dearly each year.
Why Retirees Must Make This Decision Personal
Retiring in 2026 is so vastly different for so many retirees who may have retired 30 or 40 years ago.
In our own practice alone, we have several retirees who decided to hang it up at 60 and are utilizing withdrawals from their account, to several others who are 70+ and still working full-time because they love to work!
We have several retirees who know they will never outlive their savings, while others rely on their monthly “paychecks” from their retirement accounts.
So instead of listening to conventional wisdom about how you should be more conservative or aggressive as you age, you should instead be more conservative or aggressive as you time the need of your funds.
Going a step further, we have many retirees who have several different accounts. Often broken out by Traditional Assets (otherwise known as pre-tax), Roth, and non-qualified (otherwise known as after-tax). And depending on when you need each of these funds, we can see a mistake many retirees tend to make, and a great example is in how target-date funds work.
The Target Date Fund Trap
To start, this is not to say target-date funds are bad, or that they have no practical use case.
If you have a 401(k), there’s a good chance you own a target date fund. Per Sway Research, there’s over $5T of assets that Americans hold in these types of funds via retirement plans and the like.
The classic “set it and forget it” approach (which always makes me think of the old rotisserie over from the 90’s), can be an easy way to invest and be hands off.
But target date funds are the ultimate example of allocating by age instead of timeline. And they get it wrong for many pre-retirees who are still working and retirees alike.
How They Actually Work
Before I show the comparison, I want to be very clear that there are two disclaimers.
- The allocation a person chooses must be made on their time horizon and risk tolerance. This is in no way a recommendation of a set of strategies for a pre-retiree or retiree, but rather, meant for illustrative purposes only.
- The examples used are in no way a recommendation to purchase any of these securities, and these are strictly used for illustrative and educational purposes only.
Target date funds follow a “glide path” – a predetermined formula that shifts from stocks to bonds as you approach and move through retirement.
Looking at an example, and this is strictly an example of different funds, here are two target date funds. The first is Vanguard Target Retirement 2025 Fund:
As we can see, it’s a nearly 50/50, with just over 48% in stocks/equities, and the rest in bonds or cash.
Conversely, we have the Vanguard Target Date 2045 Fund:
This fund is closer to an 80/20 split, with just over 81% in stocks.
One size fits all, based entirely on your retirement date.
But what if you get to retirement, and you don’t need your funds. What if you don’t foresee ever needing your funds? Is the 2025 fund a good pick?
What You Could Be Leaving on the Table
I’m going to look strictly at the numbers, and not focus on a person’s risk tolerance. But if we look over the last 5 & 10 years, we can see the average returns:
How would it instead compare to the Vanguard Total Stock Market Index Fund? Unsurprisingly, not well over the 5 and 10 year averages:
If we look forward, and say that someone in 2015 would have had one investment in the 2025 fund, and another investment in the Vanguard Total Stock Market Index Fund, it notes quite a difference. Someone invested in the target-date fund:
Against someone who is investing in the total stock market index:
**of note: the VTSAX is comprised of 100% equities, meaning the risk involved of losing money is more significant than that of the Target-Date fund shown.
Why This Matters
It goes without saying that a difference of 6+% over a 10 year time period is substantial, specifically as you build more and more wealth. But the need and timing of the need is what is so critical!
If I knew in retirement I wouldn’t need to touch my funds, that’s very different for someone that would need access to the funds.
While I recognize we are comparing portfolios that have completely different assets, we need to ask ourselves what kind of portfolio we should be considering in the first place. And if the answer is “someone else’s who is retiring the same year I am,” I think there could be significant dollars left on the table without first diving deeper.
A Better Question Than “What Should My Allocation Be?”
Instead of asking “What should my allocation be at age 67?” ask better questions:
- When will I need different portions of this money?
- How much do I need from my portfolio each year?
- What other income sources do I have?
- Could I delay withdrawals for 2-3 years if the market crashes?
- How much am I planning to leave to heirs, and when will they actually need it?
- What’s my actual ability to handle a market downturn without changing my lifestyle?
These questions lead to allocations based on reality. More specifically, a reality that is personalized to you and your needs and dreams.
How To Determine This
If you’re currently using an age-based allocation and it doesn’t match your actual timeline for needing money, here are a few steps to consider:
Review your current situation: List out your income sources (Social Security, pension, part-time work, rental income). Calculate how much you actually need from your portfolio annually.
Map your timeline: Determine when you see needing income in retirement. Every dollar should have a purpose. Whether it’s a short-term, mid-term or long-term purpose. It’s helpful to know this so you can invest and allocate it accordingly.
Calculate appropriate allocations for each bucket: Short-term money stays safe. Mid-term money can take moderate risk. Long-term money should be growth-oriented regardless of your age.
Revisit annually or after notable life events: Your timeline-based allocation should shift over time, but much more slowly than age-based formulas suggest. Review once a year and adjust as needed.
If you need help developing an allocation strategy based on when you actually need your money rather than when you were born, we can help. At Hyperion Financial, we work with retirees to build portfolio strategies that match your specific timeline, income sources, and goals.
We’ll analyze your situation and show you what allocation actually makes sense for your circumstances.