Future retirees who invested in target-date funds might reconsider their retirement planning. It’s because stocks and bonds are facing sharp downturns. The S&P 500 registered a 23 percent decline in 2022 and bear market territory. On the other hand, bonds are taking lumps, with the Treasury yield rising 3.48 percent just recently. How will these data affect the retirement funds 2022 level?
Stocks and bonds are declining, and inflation is rising. This is a shocking combination, especially for new retirees.
The so-called “sequence of returns” risk is severe for those who’ve just retired. Withdrawing money from investments with declining value affects the longevity of their nest egg. Favorably, there are ways to mitigate the risk while giving investments time to recover.
Bond Prices
Bond prices change inversely to yields. As the Federal Reserve pursues its interest rate increase campaign, more pain and volatility are likely expected for both sides of the portfolio.
Target-date funds (TDFs) are a primary component of 401(k) plans. The TDFs aim to take the assumption out of investing and lower risk as investors get closer to their retirement date. But many near-dated funds – including retirees by 2025 – are seeing double-digit declines this year as stocks and bond prices plunge.
“Existing bond portfolios can get hurt with the Federal raising rates, so it’s not reducing risk as much as you’d believe.” – Jamie Hopkins, Carson’s Managing Partner of Wealth Solutions
“Bond portfolios in TDFs have a period of 6.5 to 7 years. This can expose older workers to bond market sell-offs as they near retirement age.” – Jared Woodard, Bank of America’s Investment and ETF Strategist.
Megan Pacholok of Morningstar said that bond and stock linkage have turned positive. She announced that revisions in allocations fund families could make small changes to their yearly allocation. However, some firms announced updates to their fixed income sleeves before 2022’s bond market beat up.
For example, BlackRock has based the fixed income portion of its LifePath Index Retirement Funds on the Bloomberg Barclays Aggregate Bond Index. Last October, BlackRock announced that it would break up the aggregate index into its components, including:
- U.S. Treasurys of different durations
- Corporate bonds
- Securitized assets
Later, BlackRock will weigh them depending on where investors are in their life cycle. According to Nick Nefouse, head of LifePath at BlackRock, older investors focused heavily on government securities. The firm’s LifePath Index 2025 Fund is down about 16%. Small allocations toward different assets like commodities and real estate investment trusts – have helped to minimize the impact.
What To Do When Retirement Funds 2022 Are Getting Beat Up
The best tool we need to manage the uncertainties is diversification.
Investors who have taken a “set it and forget it” point of view toward retirement saving may need to change track. They should do it, especially if they’re near their target date and facing sharp losses. Below are some starting points:
- Know what you have: All target-date funds have a declining path that grows more conservative up to the target date.
- Adopt a hands-on attitude for retirement spending: The mindset has to shift from allocation in investing to spending. This could entail working with a financial advisor to develop a strategy to invest your savings and draw them down sustainably. If you were someone in a TDF, you might enjoy using a bucketing approach for needs, wants, and wishes.
- Resist the urge to collateral: A challenge for both equities and fixed income will affect investors. But avoiding the market now is equivalent to cashing in when losses are at their worst.
“If the market worsens it could be frightening. You might want to make withdrawals, but then you miss the rebounds,” Megan Pacholok said.
