Q: My target-date fund gained about 1% last year, even though the Standard and Poor's 500-stock index rose nearly 30%. What happened?
A: You now understand the difference between "to" and "through."
Target-date funds gear their investments toward your retirement date. As you get closer to retirement, the fund becomes more conservative, decreasing its investments in stocks and increasing its holdings in bonds and money market securities, or cash. After all, when you don't have employment income, you can't make up your losses by adding more money from your income.
The average target-date fund geared toward 2015 gained 9.3% in 2013, according to Lipper, which tracks the funds. The top-performing fund, the American Funds 2015 Target Date Retirement fund (ticker: AABTX), gained 15.3% last year. The worst fund, Pimco RealRetirement (ticker: PTNNX) 2015, eked out a 0.09% gain.
The difference? Traditionally, retirees moved much of their assets to bonds and money market securities when they stopped working. When you retire, you want your investments to throw off as much income as possible to augment your
But when you retire, you can expect to live another 30 years or so, which argues that a target-date fund should manage your money through retirement. The American Funds 2015 offering that approach has 45% in growth and growth-and-income funds, 20% in equity-income and balanced funds, and 35% in bond funds.
Which is better? If you want an income fund the moment you retire, then put yourself in the "to" camp. But if you want your fund to manage your assets throughout two or three decades of retirement, the "through" camp is the way to go.
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