Balanced/Target Funds

[mike hall]

I plan to retire soon. some income from Pensions, supplemented by 401K, IRA, after-tax investments.

For some time while accumulating, I have used "Target" type funds with Vanguard and Fidelity. Ha-Ha pointed out in another thread, that there is a lot of info out there for accumulating, but not so much for the withdrawal stage.
I agree. In light of recent events, I'm wondering if balanced/target funds would be less appropriate for the withdrawal stage of retirement due to the fact that you can't decide to withdraw only from bonds versus stocks, or money market based on prevailing conditions?


Also in May I moved some money to a bond fund, and will have a CD ladder to hopefully allow me to leave things invested in stocks alone for several years if necessary. Would a book like "Buckets of money" help to make decisions about where to draw from?

What's your advice?

Mike

 

[FIREd]

You can easily find balanced or target funds paying north of 4% dividends. So I think that most people would just cash in the dividends and live on that.

 

[dex]

if you have the laddered CDs why do you need to withdrawl from the Target funds.
I think you should plan out your cash flow - including dividends and CDs - needs to determine when or if you need to touch the target funds.

 

[Rich_by_the_Bay]

I'm wondering if balanced/target funds would be less appropriate for the withdrawal stage of retirement due to the fact that you can't decide to withdraw only from bonds versus stocks, or money market based on prevailing conditions?

Mike, target funds are as you suspect. They are adequate for accumulation if they meet your risk tolerance and asset allocation goals.

But come withdrawal time, you are forced to withdraw pro rata from both stocks and bonds. Not good, especially if you believe, as I do, that it is wise to draw down cash and bonds as long as you safely can before you start whittling at your stocks.

Managed payout funds are a bit better suited for withdrawal I think, though even they are murky about how they cash in on your behalf. Personally, I have a fairly simple diversification scheme with separate funds for each component, and with the total stock index doing the heavy lifting. Bonds and cash are in yet other funds. I can pick and choose where I want my allowance from.

 

[yakers]

I have the same kind of issue as the major retirement fund I hold is in a target retirement type fund. I retired March 08 but do not expect to began withdrawals until 2010m so I''ll see what I actually do when withdrawal time actually comes. I expect to just take monthly withdrawals then, my reasoning is that rather than switch to two funds stocks/bonds and just withdraw from one of them is that I would need to rebalance anyway if one were to get out of whack. The target retirement fund keeps my AA where (I think) I want it at all times. There may be something to be gained from managing two funds but I am not sure how much is to be gained and if there is increased risks of getting something wrong and getting a lower return than just holding a target retirement fund. A target type fund should capture most rebalancing gains I think.
But it is a good question as TR type funds are really well thought out for accumulation but have not been tested by fire yet in withdrawal stage and I am hoping things work out as forecast.

 

[mike hall]

thanks for the replies. I don't to withdraw from the funds immediately, since I have the CD's but I will at some point.

 

[unclemick]

I have the same kind of issue as the major retirement fund I hold is in a target retirement type fund. I retired March 08 but do not expect to began withdrawals until 2010m so I''ll see what I actually do when withdrawal time actually comes. I expect to just take monthly withdrawals then, my reasoning is that rather than switch to two funds stocks/bonds and just withdraw from one of them is that I would need to rebalance anyway if one were to get out of whack. The target retirement fund keeps my AA where (I think) I want it at all times. There may be something to be gained from managing two funds but I am not sure how much is to be gained and if there is increased risks of getting something wrong and getting a lower return than just holding a target retirement fund. A target type fund should capture most rebalancing gains I think.
But it is a good question as TR type funds are really well thought out for accumulation but have not been tested by fire yet in withdrawal stage and I am hoping things work out as forecast.

Big Dog on the porch - Target Retirement 2015 since Jan 2006, before that Lifestragety moderate. Age 65 15th going into 16th yr of ER in 2009.

I use the high tech method of withdrawal(ex engineer) - I wet my finger and check the nervousness of my belly button:

SEC yield of portfolio(ballpark 3% usually) if I percieve hard times ahead or 5% variable if good times/or remodeling is on the agenda.

I figure hand grenade wise in another 15 years I'll have an idea of how it works.

By the by - with exceptions I have been closest to the 60/40ish 'policy portfolio' for most of my investing life.

heh heh heh - circa 1980 I read that the pension portfolio of most big companies was 60/40 - so I loosely copied them.

 

[Animorph]

Yep, bonds and stocks in one fund kind of eliminates the option to sell bonds-only during bad markets. I'd go with a more agressive target fund or pure stock fund plus a separate bond fund. You can also take out cash when your investments are ahead of your retirement plans and use that when the market is down. That still lowers both stocks and bonds in a target fund but it avoids taking anything out during dips as long as the cash lasts. That's my approach with 100% equities.

 

[yakers]

I think these funds can be more difficult to understand than 'just' an expected retirement/withdrawal start date. There is an article addressing this today in USA Today:
Even target maturity funds have gotten spanked by bear market - USATODAY.com

You need to understand the makeup of the target retirement fund as well as its expenses.
It is interesting that the Federal Govt TSP Lifecycle 2020 fund I have has lost 12.07% YTD and 13.01 for the last 12 months

TSP: Rates, Current Monthly Returns; 2008 Oct 01

I think this is because the TSP is diversified with total US stock, total international stock, total (US) bond and a stable value element which must be the source of less losses during the period.

I still think the concept of a target retirement fund is good as it provides an asset allocation for a target date, becomes more conservative over time and most important....it keeps me from playing with it and trading at the wrong time. I do expect some smart or lucky traders will beat the fund but I already personally know a few who have done far worse.