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Not On Target
Are Target Date Funds Ruining Retirement?
From our YouTube Channel:
 While target date funds (TDFs) offer a set-it-and-forget-it strategy during the accumulation phase, they often fall short in retirement. Here’s why:
1. One-Size-Fits-All Allocation May Not Suit Your Needs
- TDFs follow a generic glide path, which may be too conservative or too aggressive for individual retirees.
- Doesn't adjust for personal financial circumstances, such as pension income, liquidity needs, or longevity risk.
2. Glidepaths Are Often Too Conservative
- Popular funds (e.g., Vanguard TDFs) may be too conservative in both accumulation and decumulation phases.
- Reducing stock exposure too aggressively limits growth potential when retirees may need it most.
3. Limited Flexibility in Withdrawal Strategy
- Retirees often need dynamic withdrawal strategies based on market conditions and tax efficiency.
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TDFs force proportional withdrawals, preventing retirees from taking advantage of:
- The Bucket Strategy, which separates assets into cash, bonds, and stocks.
- The 4% Safe Withdrawal Rate Rule, which sells bonds in bad markets and equities in good times.
- Dividend or income-based strategies to provide a predictable cash flow.
4. Poor Adaptability to Market Conditions
- TDFs do not adjust dynamically to market downturns.
- Withdrawals during a bad market force retirees to sell assets at a loss, amplifying sequence-of-returns risk.
- Aggressively decreasing risk in down markets because the glide path says you have to means you are locking in losses, selling equities low, and buying bonds high.
5. Lack of Estate & Tax Planning Benefits
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TDFs cannot optimize tax strategies such as:
- Harvesting gains or losses strategically.
- Little or no exposure to Muni bonds for higher-income folks.
- Tax location optimization, ensuring high-dividend funds are held in tax-deferred accounts.
- Efficient withdrawal sequencing from taxable vs. retirement accounts.
- Legacy planning ensures assets are structured tax-efficiently for heirs.
Your retirement is unique; your portfolio should be too! 6. High Fees for a Passive Strategy
- Many TDFs layer fees by investing in underlying mutual funds, making them more expensive than other portfolios.
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Cost comparison:
- Vanguard TDFs: Low-cost at 0.08% expense ratio.
- Other actively managed TDFs: 0.75%-1.00%, much pricier than simpler ETF-based strategies.
7. TDFs Are Not a Complete Retirement Plan
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A target date fund is just an investment vehicle—it does not account for:
- Savings rate optimization.
- Income sources in retirement (Social Security, pensions, annuities).
- Withdrawal sequencing and risk mitigation.
- Other retirement goals.
- Rigid, lacks customization and flexibility—a poor fit for tailored financial planning.
What Are the Advantages of TDFs?
Though limited in retirement, TDFs do offer:
- Better than nothing (BTN)—a simple option for hands-off investors.
- Automatic rebalancing keeps risk levels in check.
- Diversification provides exposure to different asset classes.
- Some are low-cost choices, especially with firms like Vanguard.
TDFs can be great for workplace auto-enrollment defaults because they are usually better than doing nothing, but for retirees, they can be dangerous. Blindly following directions regardless of external or internal circumstances could have you walking right into a minefield -- but at least you stuck to the TDF doctrine, right? There are easy buttons for some things, but not all.
If you don't have a plan and would like to get one, schedule a Discovery Meeting:
To health and wealth!
Mark Struthers, CFA, CFP®, CRC®, RMA®
For current clients looking for a meeting:
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