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At a time when investing for retirement seems more and more complicated, target-date retirement funds are uber-popular: Target-date funds are a simple way to own a diversified portfolio of stocks and bonds that gradually gets more conservative. The closer you are to retirement, the less risk the fund will take — a sensible strategy that has attracted $3.27 trillion, or 42 percent of all 401(k) plan assets.
But the strategy hasn’t worked out well so far this year for those whose target-date funds aim for retirement in the next several years. As of July 1, 2022, Morningstar reports that the average 2025 target-date fund is down by 14.64 percent. That’s nearly three times the drop as in the worst full year over the past decade. Though funds with later retirement dates did even worse, at least those investors should have time for markets to recover before they have to withdraw. When you combine these losses with the 8.6 percent inflation over the past year quickly evaporating purchasing power, retirement isn’t looking very good. What gives?
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Morningstar reports that the five largest target-date fund families are T. Rowe Price, Vanguard, Fidelity, American Funds and BlackRock. Their 2025 target-date funds hold between 48 and 58 percent in stocks. It’s not exactly a surprise that they would have losses during a bear market for stocks, but the magnitude of the losses does surprise me.
I view bonds as the culprit. Normally, bonds act as a shock absorber in a bear market. Not this time. The average intermediate-term core bond fund has lost 9.99 percent this year through July 1, according to Morningstar. Jason Zweig reported in The Wall Street Journal that this is the worst start to the bond market since 1842.
(Bond prices fall when interest rates rise: No one wants a bond yielding 2 percent when newly issued bonds yield 3 percent. In the first half of 2022, the yield on the bellwether 10-year Treasury note nearly doubled.)