Target-date funds work up to a point. So don’t just set it and forget it

When you find yourself about a decade away from retirement, it might be time to evaluate whether that target-date fund you’ve been investing in still makes sense for you.

Although these “set it and forget it” funds offer a way to put your savings on autopilot by gradually shifting over time to more conservative assets (bonds and, perhaps, cash) and away from riskier holdings (stocks), they may stop making sense at some point, depending on your situation.

“When you’re about 10 years away from retirement — say, in your mid-50s — you really need to be taking a holistic view and look at your whole financial picture,” said certified financial planner Chris Mellone, a partner with VLP Financial Advisors in Vienna, Virginia.

“We believe a more customized asset allocation approach is needed for this segment [of investors],” Mellone said.

Roughly $1.8 trillion is invested in target-date mutual funds, according to Morningstar. Most 401(k) plans — 98% — include this kind of fund in their lineup, according to Vanguard. And 80% of all 401(k) participants are invested in these funds.

For young investors or those with little investing experience, target-date funds are particularly practical, advisors say, given the asset allocation reflects a long time horizon until retirement (a fund might put as much as 95% or more in stocks when you’re in your 20s), and there’s automatic rebalancing and de-risking over time.

That usefulness can change, however.

“The not-so-good thing is that you put it on autopilot for the next 20 years and as it’s getting larger, you’re progressing in your career and life, and you’re getting other assets,” said CFP Charles Sachs, chief investment officer for Kaufman Rossin Wealth in Miami.

“Then the target fund is working in isolation, and that’s the point when you need some coordination,” Sachs said.

For example, say you reach a point where your target-date fund is 70% in stocks and 30% in bonds. Also say you have money in another fund that’s invested solely in stocks or a stock index. Depending on the amount, your stock/bond ratio could be more like 90%/10%, which may not be appropriate for your risk tolerance (generally how well you can stomach market volatility and how long until you need the money).

“When they start adding investments to their total portfolio, that could mean taking on additional risk that they’re not aware of,” said Megan Pacholok, an analyst with Morningstar. “Their allocation is no longer what they thought it was.”

Generally, these funds reach their target year with at least some money still invested in stocks and continue doing so, although some may reduce their equity holdings.

While some advisors say there’s nothing wrong with continuing to rely on target-date funds in retirement, others say there are reasons to reconsider.

For example, if you need to move money from one during a market pullback, it could mean selling stocks when they’re down — whether you want to or not.

“If you’re taking distributions from a target-date fund, you’re taking from both bonds and stocks indiscriminately,” Mellone said. “We’d rather break those pieces apart and see what makes the most sense for funding distributions.”

For instance, if you know you’ll need to generate $100,000 from your retirement savings each year, you can plan to have a certain number of years’ worth of income — say five years, so $500,000 — in cash and bonds, so you aren’t put in the position of selling stocks or other volatile investments in a down market. At the outset of retirement, that can be especially detrimental to the long-term value of your nest egg.

The bottom line, experts say, is to be sure to reevaluate whether your target-date fund still makes sense as your financial life grows more complex or you’re nearing retirement.

“It could be working for you or against you, but you have to track it to know,” Sachs said. “So don’t set it and forget it forever.”