Is there a problem with glidepath (target date funds) for retirement savers?

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Rodc
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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by Rodc » Sat Oct 10, 2015 6:46 pm

bobcat2 wrote: The topic is not the allocation between stocks and bonds over time.

BobK
The OP who set the topic at hand says otherwise:
Investors who own target date funds and make regular contributions may unknowingly be overinvested in bonds relative to stocks over time. The theory behind target date funds is systematically shift the allocation from riskier stocks to conservative bonds over time. The problem with this approach for those who invest periodically is that the fund is stock-heavy in the early years when the investor has not accumulated much principal, and it is bond heavy in later years when the fund principal is larger. This results in a much higher dollar-weighted allocation to bonds than the investor may be aware of.

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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by dc81584 » Sat Oct 10, 2015 7:27 pm

leonard wrote:Ignoring taxes - how one invested in the past is a sunk cost.

What matters is matching current risk tolerance to portfolio stock/bond ratio. If a TR mirrors the investors risk tolerance, I don't see that they are losing out in any way by having the past (sunk cost) contributed money to a TR fund.
+1

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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by bobcat2 » Sat Oct 10, 2015 9:46 pm

Hi Rodc,
I answered the question.
Is there a problem with glidepath (target date funds) for retirement savers? That's the title of this thread.

The original poster then gave what he thinks is a problem with the AA of target date funds.
The problem with this approach for those who invest periodically is that the fund is stock-heavy in the early years when the investor has not accumulated much principal, and it is bond heavy in later years when the fund principal is larger. This results in a much higher dollar-weighted allocation to bonds than the investor may be aware of.
I pointed out that the bigger problem with the AA in TDFs is not taking into account the duration mismatch between the AA of the portfolio and providing reliable income in retirement as the participant approaches retirement. That is perfectly legitimate criticism of the AA paths that TDFs take.

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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by iceport » Sat Oct 10, 2015 10:54 pm

bobcat2 wrote:If 401k plans still had their original purpose of providing discretionary income beyond the retirement income produced by DB plans and SS, they would be an excellent choice for producing additional retirement assets. But as a replacement for DB plans, TDFs by design fall woefully short of meeting a retirement's plan goal of producing reliable retirement income.
It's not only TDFs; DC plans as a whole fall woefully short as replacements for DB plans. Unfortunately, there are at least two groups with vested interests in blurring the lines between defined benefit plans and defined contribution plans, and perpetuating the gross misunderstandings the general public seems to already have: private sector employers who rely on DC plans as substitutes for the DB plans they cut or eliminate, and those working to eliminate public sector DB plans.
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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by iceport » Sat Oct 10, 2015 11:24 pm

nedsaid wrote:The other thing that wasn't really addressed is why are both private and public pension plans in trouble? This tells me that pensions are riskier and more expensive than advertised. My understanding is that pensions used to meet their guarantees by matching future liabilities with bonds. Somewhere along the line, the light went off that pension plans could achieve higher returns if they invested in stocks too. Higher returns meant lower contribution rates. The problem is that stocks caused the underlying portfolios to become more volatile.

We could make pensions a lot "safer" if they went to a matching strategy with 100% bonds. But that means higher contribution rates and nobody wants to hear about that. There is also a sequence of returns problem with stocks and that applies to pension plans too and not to just individuals.
I'm not so sure about a couple of points here. Speaking for one of the most (if not the most) poorly funded state pension plans, the reasons for the plan's trouble include: historic under-funding (poor funding plan at its inception); frequent use of early retirement incentives (which slashed payroll costs at the expense of over-stressing the pension plan); and the frequent skipping of required contributions (as a convenient way to close budget gaps). To my knowledge, pension fund management or investment policy has not been a significant contributor to the problem.

On the sequence of return risk, while true that it applies to pension plans also, I would think sequence of return risks are substantially mitigated by spreading out those risks over generations, rather than individual lifespans. I've always thought mitigating the sequence of return risks to be a primary advantage of DB plans over DC plans. Is that wrong?
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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by bertilak » Sat Oct 10, 2015 11:26 pm

iceport wrote:
bobcat2 wrote:If 401k plans still had their original purpose of providing discretionary income beyond the retirement income produced by DB plans and SS, they would be an excellent choice for producing additional retirement assets. But as a replacement for DB plans, TDFs by design fall woefully short of meeting a retirement's plan goal of producing reliable retirement income.
It's not only TDFs; DC plans as a whole fall woefully short as replacements for DB plans. Unfortunately, there are at least two groups with vested interests in blurring the lines between defined benefit plans and defined contribution plans, and perpetuating the gross misunderstandings the general public seems to already have: private sector employers who rely on DC plans as substitutes for the DB plans they cut or eliminate, and those working to eliminate public sector DB plans.
Can the problem be summarized as follows: By replacing BD plans with DC plans participants have lost the benefit of pooled risk.

Can life insurance fill that gap? Seems like a way to replace the pooled risk. Maybe some new product that needs to be structured in a new way.
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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by hnzw rui » Sun Oct 11, 2015 12:55 am

iceport wrote:I'm not so sure about a couple of points here. Speaking for one of the most (if not the most) poorly funded state pension plans, the reasons for the plan's trouble include: historic under-funding (poor funding plan at its inception); frequent use of early retirement incentives (which slashed payroll costs at the expense of over-stressing the pension plan); and the frequent skipping of required contributions (as a convenient way to close budget gaps). To my knowledge, pension fund management or investment policy has not been a significant contributor to the problem.
Agree on the issues of underfunding and early retirement incentives. A lot of employees who get the early retirement incentives also tend to be high wage earners in key management positions so it's not like they're saving much in payroll since they end up needing to fill those positions anyway. With early retirement incentives, they're pretty much just switching the burden from current payroll to pension contributions. This is made worse by the fact that now you have less employees (typically lower earning ones) contributing to the pension plan and more retirees (typically higher earning ones) drawing from it.
iceport wrote:On the sequence of return risk, while true that it applies to pension plans also, I would think sequence of return risks are substantially mitigated by spreading out those risks over generations, rather than individual lifespans. I've always thought mitigating the sequence of return risks to be a primary advantage of DB plans over DC plans.
+1. Unlike individuals who are only drawing from their savings, pension plans have both inflows (employer and employee contributions, real estate income, etc) and outflows (pension benefit payments, refund of employee contributions, etc). Also, unlike an individual, pension plans can amortize shortfalls in funding over a long period of time. Meanwhile, the individual retiree would just have to go back to work or rely on SS if he runs out of savings (asuming there's SS - do other countries have something similarto SS?).

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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by Alex Frakt » Sun Oct 11, 2015 1:29 am

Please stick the OP's issue. Economic policy is off topic here.

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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by nedsaid » Sun Oct 11, 2015 10:17 am

I guess my whole point is that guaranteeing an inflation adjusted income stream is just not easy. Many pensions do not adjust for inflation, it is hard enough to create steady income streams for retirees much less guarantee inflation adjustments.

Private employers have been running away from pensions for years. For whatever reasons, some public pensions are in trouble. What happens is that during bull markets that people get used to higher returns and assume that is the norm. This has happened both in the private and public sector.

I have read the threads featuring BobK. This stuff gets to be pretty sophisticated. I learned yesterday about matching the duration of the bonds you are setting aside to buy a future annuity with the estimated duration of the annuity itself. It makes sense but you have to think it through. It is beyond the grasp of most investors. Frankly it is beyond most insurance salespersons. It is a great idea though and those who want to "pre-fund" a future annuity should look into this.

Target date funds are accumulation vehicles. The idea is to accumulate enough money so that you can either take inflation adjusted withdrawals from the portfolio or at some point apply those funds to some sort of matching strategy. What gets lost in this whole discussion is that there is an accumulation phase and a distribution phase. If you have a large enough portfolio, one could start applying matching strategies during the accumulation phase perhaps a few years before drawing the funds out. Bob never seems to address this transition. He seems to only talk about matching.

When I started retirement saving at age 24, I had very little money. That certainly wasn't the time to try to "match" retirement obligations 40 plus years down the road. My focus was simply getting money set aside and investing it the best I could.

Another reason that I think these matching strategies are harder to execute than what one would think is my experience learning about Ray Lucia's "Buckets of Money" strategy. It was a simple and elegant strategy but the weak point was the very low level of interest rates that we have experienced the last few years. To compensate for low interest rates, Ray resorted to sub-buckets and using things like Single Premium Immediate Annuities and non-Traded REITs to stretch for more yield. It finally got to be a very complicated Rube Goldberg device.

My suspicion is that very low interest rates have put a monkey wrench in a whole lot of things. It seems to me this would increase the costs of applying a matching strategy.
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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by Browser » Sun Oct 11, 2015 10:57 am

I think the simple fact remains this: Target Date funds since their inception have failed to outperform ordinary static balanced allocations, either in terms of maximizing the real value of one's nestegg or in terms of reducing uncertainty about the prospective income one will have in retirement. I await data to the contrary. Until then, I can see little merit in TDFs beyond the typical "set it and forget" it lazy portfolio strategies -- even for the bozos.
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"Automatic' Gains for Target-Date Investors"

Post by Taylor Larimore » Sun Oct 11, 2015 11:09 am

Browser wrote:I think the simple fact remains this: Target Date funds since their inception have failed to outperform ordinary static balanced allocations, either in terms of maximizing the real value of one's nestegg or in terms of reducing uncertainty about the prospective income one will have in retirement. I await data to the contrary.
Browser:

Read this: Automatic' Gains for Target-Date Investors

Best wishes.
Taylor
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Re: "Automatic' Gains for Target-Date Investors"

Post by nedsaid » Sun Oct 11, 2015 11:16 am

Taylor Larimore wrote:
Browser wrote:I think the simple fact remains this: Target Date funds since their inception have failed to outperform ordinary static balanced allocations, either in terms of maximizing the real value of one's nestegg or in terms of reducing uncertainty about the prospective income one will have in retirement. I await data to the contrary.
Browser:

Read this: Automatic' Gains for Target-Date Investors

Best wishes.
Taylor
Taylor, I saw the video and recommend it for viewing by all Bogleheads.
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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by Browser » Sun Oct 11, 2015 11:31 am

The glidepath strategy holds out the promise of reducing the volatility and drawdown risks of one's retirement portfolio as one approaches retirement, thus providing more certainty about the income it can provide during retirement. I don't agree that the glidepath method actually does that effectively, since it isn't directed toward an income goal in the first place. But setting that point aside, that expectation would be most appealing to people who can least afford portfolio losses as this would put their income needs for retirement in peril, with a large consequent impact on their retirement plans. It seems to me, ironically, these are the very people who would be much better off not using a TDF, and instead following a "floor", or liability-matching, strategy instead.
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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by nedsaid » Sun Oct 11, 2015 11:33 am

bobcat2 wrote:
nedsaid wrote:If I need let's say $40,000 in income above Social Security when I retire, that translates into needing approximately $600,000 in cash to buy Single Premium Immediate Annuities to replace that income. One can say, well you need to think about income in retirement rather than a "magic number" that you need in a retirement nest egg. Yes that is a good way to think about retirement planning but to buy the needed income there is still a "number" or a set amount of cash needed to buy that income.
The above is incorrect.

If a 65 year old male had purchased a real life annuity in 2007 that produced $40,000/year in income, it would have cost about $625,000. Had a 65 year old male purchased a real life annuity just two years later in 2009 that produced $40,000/year in income, it would have cost about $950,000. This is because interest rates fell between 2007 and 2009.

Life annuities have long duration. Their prices and payouts are very sensitive to changes in interest rates. You can’t set aside a given portfolio value and think you have locked in a level of annuitized income. That is folly.

See the following thread for more on this issue.
viewtopic.php?f=10&t=174991
Bob, I was talking about a Single Premium Immediate Annuity at age 65 not adjusted for inflation. I noticed that you inserted the word "real" which to me means inflation adjusted. Pretty much you are saying that the cost difference between an SPIA guaranteeing $40,000 year and a real SPIA guaranteeing $40,000 is roughly $300K to $400K. Of course your quote on the real SPIA was in 2009 and interest rates have not hugely changed since then. See what I mean by trade-offs? See what I mean about the additional costs of an inflation adjusted income stream? Those additional costs are over $300K.
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Re: "Automatic' Gains for Target-Date Investors"

Post by Browser » Sun Oct 11, 2015 11:50 am

Taylor Larimore wrote:
Browser wrote:I think the simple fact remains this: Target Date funds since their inception have failed to outperform ordinary static balanced allocations, either in terms of maximizing the real value of one's nestegg or in terms of reducing uncertainty about the prospective income one will have in retirement. I await data to the contrary.
Browser:

Read this: Automatic' Gains for Target-Date Investors

Best wishes.
Taylor
Very important point about setting and forgetting one's portfolio allocation. And it is probably true that a lot of people simply take the default option in their company retirement plan and just stick with that, which presently is most likely going to be a TDF. And the hype around TDFs probably persuades people to do that. But I figure if the default option was a 50/50 balanced fund or something like that they'd probably do the same thing and do just as well -- but not as much hype opportunity as with TDFs. It's too bad we are a nation of financial illiterates...
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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by ogd » Sun Oct 11, 2015 12:59 pm

Browser wrote:I think the simple fact remains this: Target Date funds since their inception have failed to outperform ordinary static balanced allocations, either in terms of maximizing the real value of one's nestegg or in terms of reducing uncertainty about the prospective income one will have in retirement. I await data to the contrary. Until then, I can see little merit in TDFs beyond the typical "set it and forget" it lazy portfolio strategies -- even for the bozos.
Brower: let's talk a bit more concretely because I really think the time integral is misleading you on this.

Suppose I put the following constraint on my allocation: that at age 55 (hopefully), with a lot of money on the table, the allocation will be no more than 40/60 as I retire. This is because I'm about to stop contributing and start withdrawing next month. That's the only constraint.

Now tell me, what should my allocation be 20 years earlier? Do you really think it should be the same 40/60? Won't the TDF beat this handily? Just answer this question before going back to abstract stuff.

It's no surprise to anyone that a TDF is beaten by a static-initial allocation and in turn beats static-final. It's not some great insight. The question is where do you situate yourself between these two, and can you take advantage of the very real difference in horizons between initial and final, as opposed to simplifying to a time- (or dollar-)averaged-risk that completely ignores this difference.

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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by iceport » Sun Oct 11, 2015 1:38 pm

Along the lines of missing the forest for the trees, any long term AA *plan* is better than no plan. Having no plan leaves the individual's stock and bond mix open to being buffeted about by market and (potentially even stronger) emotional forces, to the investor's great disadvantage. Perfect or not, inferior to a simpler stepped or static AA or not, having *any plan* to follow is far superior to the common alternative investor habits.
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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by hnzw rui » Sun Oct 11, 2015 2:09 pm

Browser wrote:The glidepath strategy holds out the promise of reducing the volatility and drawdown risks of one's retirement portfolio as one approaches retirement, thus providing more certainty about the income it can provide during retirement. I don't agree that the glidepath method actually does that effectively, since it isn't directed toward an income goal in the first place. But setting that point aside, that expectation would be most appealing to people who can least afford portfolio losses as this would put their income needs for retirement in peril, with a large consequent impact on their retirement plans. It seems to me, ironically, these are the very people who would be much better off not using a TDF, and instead following a "floor", or liability-matching, strategy instead.
The question there is whether people will have sufficient assets to do a floor or liability-matching strategy. You're gonna need more assets if you expect lower returns.
Browser wrote:But I figure if the default option was a 50/50 balanced fund or something like that they'd probably do the same thing and do just as well -- but not as much hype opportunity as with TDFs.
Stocks have tended to outperform bonds over long term. For someone who starts investing at age 25 and plans to retire at age 65, that person will have AA of 90/10 for the first 15 years using a Vanguard TDF. Chances are after 15 years, the TDF will have a higher balance than the fixed 50/50 or 60/40 allocation portfolio (at the expense of higher volatility).

According to FireCalc, here are the backtesting results for someone who contributes $10K/yr for 15 years:

50/50
Low: ~$65,000
Ave: $135,968
High: $212,971

60/40
Low: ~$65,000
Ave: $142,343
High: $235,898

90/10
Low: ~$65,000
Ave: $162,678
High: $321,348

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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by nedsaid » Sun Oct 11, 2015 3:21 pm

bobcat2 wrote:Stating the value of target date funds in terms of annuitized income available is a proposed change in information that 401k plans need to provide to participants. Companies that sell target date funds are fighting this rule change. Reporting this information would show that the amount of annuitized income a target date fund is producing over time is bouncing all over the place. This is because of both changes in portfolio values and changes in interest rates over time. It would show that target date funds are very risky in terms of producing reliable retirement income.

Nedsaid: Isn't this true for any portfolio? You have pretty much stated the reason that private employers have almost completely gotten out of the business of offering pension plans. Changes in market conditions and interest rates can make the needed contributions to meet pension liabilities very volatile.

For business planning, you need to have more stable numbers. That is why private employers went to defined contribution plans and elected to provide a match for employee contributions. A match is much more predictable and much easier to plan for.

With a former employer, the financial crisis caused a shortfall of hundreds of millions of dollars. They were guaranteeing a modest 3% over inflation for the return on the cash balance pension and the financial crisis pretty much blew all that to smithereens. They froze the pension. How do you plan for a sudden 1/2 billion shortfall in your pension plan?

Pensions are risky also but you can pool the risk among many employees and a pension fund can survive temporary shortfalls. But there might have to be adjustments in the amounts that employer and employee contribute in order to keep it sound. In the case of my former employer, they decided that the needed contributions were too much and instead froze the pension.


BobK

PS - I believe that target date funds are some improvement over the options in most 401k plans. If 401k plan offerings were high quality options and few in number, I think that would be just as good. A 401k plan that offered the follow four funds would be just as good in my opinion - a broad based US stock fund, a broad based international stock fund, and ST and LT TIPS funds. The current DC plan design is a poor design for being the primary retirement asset. The design of DC plans needs to be reformed with the focus on the output (income) and much less focus on input values such as AA. In short, DC plans need to be redesigned to perform more like DB plans.
Nedsaid: Again, for there to be output there has to be some form of asset accumulation to back up future retirement income streams. One just cannot get around that.

Met Life has offered a pension builder plan with which an employee can purchase income. But the amount of income purchased with each dollar contributed varies with interest rates. So the rate of income I can lock in per dollar of contribution might change from year to year. At least that is my understanding of the product.

Let's imagine a scenario where this product is offered to employees. Let's say that this was offered in 1982. Older employees who started in 1982 could have locked up higher rates of retirement income than the poor slobs who started in 2009. The older employees would have greater income per dollar of contribution because they benefitted from the higher interest rates that existed earlier in their careers. Can you imagine all the crying and screaming over how "unfair" this is?

Despite that, the Met Life product is worthy of consideration. This way an employee could actually buy future income. But like anything else, there are drawbacks to this solution.
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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by bertilak » Sun Oct 11, 2015 3:35 pm

nedsaid wrote:Let's imagine a scenario where this product is offered to employees. Let's say that this was offered in 1982. Older employees who started in 1982 could have locked up higher rates of retirement income than the poor slobs who started in 2009. The older employees would have greater income per dollar of contribution because they benefitted from the higher interest rates that existed earlier in their careers. Can you imagine all the crying and screaming over how "unfair" this is?
nedsaid, if one steps back to look, is it really unfair or is it just exposing the facts of life? It makes transparent how much an invested dollar is really worth. As one sees the level of income being bought with each paycheck deduction one can adjust upward if desired. Is this the same as buying a series of DIAs, pooled risk and all?
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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by nedsaid » Sun Oct 11, 2015 3:50 pm

bertilak wrote:
nedsaid wrote:Let's imagine a scenario where this product is offered to employees. Let's say that this was offered in 1982. Older employees who started in 1982 could have locked up higher rates of retirement income than the poor slobs who started in 2009. The older employees would have greater income per dollar of contribution because they benefitted from the higher interest rates that existed earlier in their careers. Can you imagine all the crying and screaming over how "unfair" this is?
nedsaid, if one steps back to look, is it really unfair or is it just exposing the facts of life? It makes transparent how much an invested dollar is really worth. As one sees the level of income being bought with each paycheck deduction one can adjust upward if desired. Is this the same as buying a series of DIAs, pooled risk and all?
Thank you Bertilak, you go to the head of the class. I appreciate your perceptive comment. This entire thread I have been making the "facts of life" argument.
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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by cherijoh » Sun Oct 11, 2015 4:14 pm

Browser wrote:
RadAudit wrote:
Browser wrote:Most retirement investors should have a much higher allocation to stocks than they think they have in their target date fund, based on correctly determining the allocation based on dollars invested in stocks instead of percentage invested.
Don't target date funds rebalance their holdings (stocks to bonds, bonds to stock) so the amount in the portfolio equals the percentages of the glidepath? In which case, it's not how much you invest; isn't it how the fund invests what you send them?
Not sure if this is what you are asking, but here's a simple example of dollar-weighted vs. percentage allocation. Let's say that you invest $1,000 at two different times. At Time 1, the fund allocation is set to 80% stocks, 20% bonds. At Time 2, the allocation is set to 20% stocks, 80% bonds. For simplification, assume no growth in assets.

___________Porfolio Total___Stocks_______Bonds
Time 1...... $1,000............$800 (80%)....$200 (20%)
Time 2.......$2,000............$400 (20%)...$1600(80%)
Average......$1,500............$600...........$900

On an average percentage basis, your allocation to stocks over Time 1 and Time 2 is 50% [(80% + 20%%) / 2].
On a dollar weighted basis, your average allocation to stocks is 40% [$600/ $1500]

Most people believe it's a good idea to reduce stock allocation as one approaches retirement, but many may not be aware just how much their target date fund may be tilting their portfolio toward bonds based on the dollars they actually have invested over time.

Unfortunately, the literature on target date funds very seldom takes account of the risk and returns for investors who are dripping in their savings with periodic investing over their investing horizon. These results can be quite different than for a hypothetical lump sum investment made at the front end.
Browser - I have highlighted the problem with your analysis. For simplicity, you have made a truly bogus assumption. If you invest over 30 years, you are compounding your early contributions for more years and your expected returns are also higher in the earlier years. By assuming zero growth you have overlooked both key factors, so the analysis is flawed.

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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by Browser » Sun Oct 11, 2015 9:42 pm

Browser - I have highlighted the problem with your analysis. For simplicity, you have made a truly bogus assumption. If you invest over 30 years, you are compounding your early contributions for more years and your expected returns are also higher in the earlier years. By assuming zero growth you have overlooked both key factors, so the analysis is flawed.
I was merely trying to give a simple illustration - not conduct a definitive analysis. I don't really understand your point. All I was illustrating is that the dollar-weighted allocation to Asset B will be higher than the average percentage allocation to Asset B if you are systematically shifting the allocation toward Asset B as the portfolio grows larger - whether that is from growth of principal and/or investment of new money. That's just a mathematical fact.
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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by hnzw rui » Sun Oct 11, 2015 11:28 pm

Browser wrote:I was merely trying to give a simple illustration - not conduct a definitive analysis. I don't really understand your point. All I was illustrating is that the dollar-weighted allocation to Asset B will be higher than the average percentage allocation to Asset B if you are systematically shifting the allocation toward Asset B as the portfolio grows larger - whether that is from growth of principal and/or investment of new money. That's just a mathematical fact.
That de-risking happens pretty late into the plan, though. Even at 10 years before the target date, Vanguard TDF AA is at 70/30, 5 years prior, it's 60/40 and on the target date, it's 50/50. It's not until 7-10 years into the plan or so that it finally goes to 30/70. Heck, there are TDFs even more aggressive than Vanguard's so I don't really see the dollar-weighing of bonds to be too heavy in TDFs.

When you're just starting out and contributions represent majority of the increase in your portfolio balance, it's relatively easier to stomach drops of 50% or more in stocks. You've also got plenty of human capital so you can afford to take more risk on the portfolio. Once someone is close to retirement or is already retired and relying on the portfolio for income, the risk tolerance might be significantly lower. Heck, absolute dollar values alone might be enough to change your risk tolerance. I think it's probably easier to lose 50% or $5,000 on a $10,000 portfolio than it is losing 25% or $250,000 on a $1,000,000 portfolio. The first you can probably replenish in a few paychecks. The latter might represent 10-20 years worth of contributions.

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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by nedsaid » Tue Nov 03, 2015 9:36 pm

bobcat2 wrote:Is there a problem with glidepath (target date funds) for retirement savers?
Yes.

Taylor Larimore wrote:
It is notable that experts in ALL major companies (including Vanguard) have designed similar target-date glide paths. To my knowledge, they ALL begin with a high allocation to stocks at younger ages and end with a high allocation to bonds in retirement. The primary reason is that most retirees cannot afford to lose their life-savings in a stock market crash.
The above assertion is false. DFA is a major company. DFA does not offer target date funds because the company considers target date funds to be an inferior product.

Here is a short DFA video explaining their view of target date funds.
Explaining What's Wrong with Target Date Funds
http://us.dimensional.com/services/dc-s ... nding.aspx

BobK
OOPS. Turns out that DFA is offering Target Date Funds. This is brand new. See here:

http://us.dimensional.com/strategies/target-date
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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by nedsaid » Tue Nov 03, 2015 9:55 pm

bobcat2 wrote:Hi Rodc,
I answered the question.
Is there a problem with glidepath (target date funds) for retirement savers? That's the title of this thread.

The original poster then gave what he thinks is a problem with the AA of target date funds.
The problem with this approach for those who invest periodically is that the fund is stock-heavy in the early years when the investor has not accumulated much principal, and it is bond heavy in later years when the fund principal is larger. This results in a much higher dollar-weighted allocation to bonds than the investor may be aware of.
I pointed out that the bigger problem with the AA in TDFs is not taking into account the duration mismatch between the AA of the portfolio and providing reliable income in retirement as the participant approaches retirement. That is perfectly legitimate criticism of the AA paths that TDFs take.

BobK
Bob, it sounds like people as they get closer to retirement should be increasing the duration of their bonds. This is counter to conventional retirement advice but it makes a whole lot of sense. I will have to give this more thought. One should think about doing that if they are planning to annuitize all or part of their retirement nest egg.
A fool and his money are good for business.

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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by jidina80 » Wed Nov 04, 2015 1:57 am

Taylor Larimore wrote:Browser:

It is notable that experts in ALL major companies (including Vanguard) have designed similar target-date glide paths. To my knowledge, they ALL begin with a high allocation to stocks at younger ages and end with a high allocation to bonds in retirement. The primary reason is that most retirees cannot afford to lose their life-savings in a stock market crash.

Target-date funds: Looking beyond the glide path in 2014

Best wishes.
Taylor
While notable experts might agree, history has shown that we should not accept 'expert' opinion on face value. Historical reference is more reliable. That is where the integrity of the glide path is apparent.

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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by Taylor Larimore » Wed Nov 04, 2015 9:50 am

While notable experts might agree, history has shown that we should not accept 'expert' opinion on face value.
Jidina80:

You are correct. However, when we are out of step in a parade, it is a good idea to reconsider what we are doing.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by Snowjob » Wed Nov 04, 2015 1:19 pm

nedsaid wrote:
bertilak wrote:
nedsaid wrote:Let's imagine a scenario where this product is offered to employees. Let's say that this was offered in 1982. Older employees who started in 1982 could have locked up higher rates of retirement income than the poor slobs who started in 2009. The older employees would have greater income per dollar of contribution because they benefitted from the higher interest rates that existed earlier in their careers. Can you imagine all the crying and screaming over how "unfair" this is?
nedsaid, if one steps back to look, is it really unfair or is it just exposing the facts of life? It makes transparent how much an invested dollar is really worth. As one sees the level of income being bought with each paycheck deduction one can adjust upward if desired. Is this the same as buying a series of DIAs, pooled risk and all?
Thank you Bertilak, you go to the head of the class. I appreciate your perceptive comment. This entire thread I have been making the "facts of life" argument.
Ned / Bert,

I'm in my early 30's and was thinking about this a lot lately. There has been lot of yapping back and forth about who is "hurt" most by low interest rates and in the discussion is never the young investors who's hard earned savings (after college debt service and everything else) is purchasing substantially less future income by way of expensive assets. It certainly makes the idea of liability matching for most young people (to your earlier point Ned) laughable. Sure I'd love to do it but at 1% real, I'd rather gamble on equities and try and make the switch later in life.

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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by bertilak » Wed Nov 04, 2015 1:42 pm

Snowjob wrote:
nedsaid wrote:
bertilak wrote:
nedsaid wrote:Let's imagine a scenario where this product is offered to employees. Let's say that this was offered in 1982. Older employees who started in 1982 could have locked up higher rates of retirement income than the poor slobs who started in 2009. The older employees would have greater income per dollar of contribution because they benefitted from the higher interest rates that existed earlier in their careers. Can you imagine all the crying and screaming over how "unfair" this is?
nedsaid, if one steps back to look, is it really unfair or is it just exposing the facts of life? It makes transparent how much an invested dollar is really worth. As one sees the level of income being bought with each paycheck deduction one can adjust upward if desired. Is this the same as buying a series of DIAs, pooled risk and all?
Thank you Bertilak, you go to the head of the class. I appreciate your perceptive comment. This entire thread I have been making the "facts of life" argument.
Ned / Bert,

I'm in my early 30's and was thinking about this a lot lately. There has been lot of yapping back and forth about who is "hurt" most by low interest rates and in the discussion is never the young investors who's hard earned savings (after college debt service and everything else) is purchasing substantially less future income by way of expensive assets. It certainly makes the idea of liability matching for most young people (to your earlier point Ned) laughable. Sure I'd love to do it but at 1% real, I'd rather gamble on equities and try and make the switch later in life.
Life may be hard, but the issue was fairness, or lack thereof, or actually relevance thereof, not difficulty. Definitions of "fair" emphasize legitimacy and lack of cheating. That's why I (and I presume nedsaid) made the point that interest rates and their effect on investment returns were not an issue of "fairness." Fairness is simply not relevant.

But, as you say, interest rates ARE relevant to investment strategies and, unfortunately (but not unfairly), sometimes things are harder than other times. The young DO have time on their side. And, as time goes on the young gain ever more control of how our economy is run. Is this unfair to us geezers?
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by nedsaid » Wed Nov 04, 2015 10:13 pm

Snowjob wrote: Ned / Bert,

I'm in my early 30's and was thinking about this a lot lately. There has been lot of yapping back and forth about who is "hurt" most by low interest rates and in the discussion is never the young investors who's hard earned savings (after college debt service and everything else) is purchasing substantially less future income by way of expensive assets. It certainly makes the idea of liability matching for most young people (to your earlier point Ned) laughable. Sure I'd love to do it but at 1% real, I'd rather gamble on equities and try and make the switch later in life.
Snowjob, I was born in 1959. I was able to start investing with my first job in late 1983. Interest rates were much higher then than today. Stocks were cheap. Think of the killing I could have made if I had a bunch of money to invest at that time. Unfortunately at age 24, I had little money. So I contributed bit by bit during the stock bull market that continued until early 2000. The bond bull market continued and may not be over yet. So during much of my investment career, I had the wind at my back. I also had whatever student loans I had paid off pretty quickly after I started working.

You are starting with headwinds. College students often have to take on a lot of debt to finance their educations. I feel for them having to start their adult life already in the hole. You are investing into stock and bond markets that are relatively expensive. You have hopefully had the benefit of at least the 2008-2009 bear market that would have allowed you to buy stock at lower prices. You should be hoping for a couple more big bad bear markets during your investing career. Hopefully the winds will change course for you at some point. Be prepared to have a high savings rate. Not what you want to hear but that is what you will need.

Thanks for your comments. And yes, you should be stock heavy at this stage in your life.
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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by Snowjob » Thu Nov 05, 2015 7:53 am

nedsaid wrote: You are starting with headwinds. .... Hopefully the winds will change course for you at some point. ..... Be prepared to have a high savings rate. Not what you want to hear but that is what you will need.

Thanks for your comments. And yes, you should be stock heavy at this stage in your life.
Not complaining about my personal situation, have done better than most in the early innings. The younger half of the millennial group -- the ones just getting started in the last 3-4 years are buying expensive equities and expensive tips -- and while student loans have been around a long time, I believe its well documented that the burden is substantially larger for the young, throw in the lack of a pension and you get exactly what I've distilled from your response.

If people used to say, save 10%, you probably need 15%+ due to lack of a pension. With asset prices being pushed by low interest rates, your probably only getting 2/3's of the value so now were looking 20-25% to make headway during this particular stretch -- And that assumes 3% real returns, try getting that on tips for liability matching -- agree with your premise, invest in something with a higher expected return to get those assets in which to buy the tips later.

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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by nedsaid » Thu Nov 05, 2015 9:26 pm

Snowjob wrote:
nedsaid wrote: You are starting with headwinds. .... Hopefully the winds will change course for you at some point. ..... Be prepared to have a high savings rate. Not what you want to hear but that is what you will need.

Thanks for your comments. And yes, you should be stock heavy at this stage in your life.
Not complaining about my personal situation, have done better than most in the early innings. The younger half of the millennial group -- the ones just getting started in the last 3-4 years are buying expensive equities and expensive tips -- and while student loans have been around a long time, I believe its well documented that the burden is substantially larger for the young, throw in the lack of a pension and you get exactly what I've distilled from your response.

If people used to say, save 10%, you probably need 15%+ due to lack of a pension. With asset prices being pushed by low interest rates, your probably only getting 2/3's of the value so now were looking 20-25% to make headway during this particular stretch -- And that assumes 3% real returns, try getting that on tips for liability matching -- agree with your premise, invest in something with a higher expected return to get those assets in which to buy the tips later.
As a society, I think we will have to adjust our expectations. My grandparents took in my grandmother's mother and my grandfather's father. They built a small home for an elderly aunt and her husband, when the husband died, their aunt moved into a small cottage behind their home. It is time for the extended family to come back.

The retirement model that we are all self-sufficient retirement millionaires and with oodles of long term care insurance is frankly just not sustainable. If siblings and parents can pool their resources a bit, I think most families would find there is enough to take care of everyone. For most families, if they can get their kids through college that is a huge accomplishment. I suspect that most of my co-workers will retire with Social Security and maybe $100,000 to $200,000 in a 401k.
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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by Dandy » Thu Nov 05, 2015 10:36 pm

The "problem" is that the fund's glide path might not be what you want, need or should have. It is one size fits all. That being said it is useful to many to have an automated glide path that should reduce risk over time in retirement.

It might be interesting if at the end of the glide it automatically moved you to a predetermined Life Strategy Fund or two to get the steady equity allocation you think you want.

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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by jidina80 » Fri Dec 25, 2015 11:44 pm

Taylor Larimore wrote:
While notable experts might agree, history has shown that we should not accept 'expert' opinion on face value.
Jidina80:

You are correct. However, when we are out of step in a parade, it is a good idea to reconsider what we are doing.

Best wishes.
Taylor
Agreed, but we can all thank Jack Bogle for being 'out of step in a parade' when he went against industry convention and created low cost, broad-based mutual funds.

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"Out of step in the parade."

Post by Taylor Larimore » Sat Dec 26, 2015 5:13 pm

We can all thank Jack Bogle for being 'out of step in a parade' when he went against industry convention and created low cost, broad-based mutual funds.
Jadina:

Thank you for a perfect reply!

Happy Holiday!
Taylor
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Re: "Out of step in the parade."

Post by nedsaid » Sat Dec 26, 2015 6:17 pm

Taylor Larimore wrote:
We can all thank Jack Bogle for being 'out of step in a parade' when he went against industry convention and created low cost, broad-based mutual funds.
Jadina:

Thank you for a perfect reply!

Happy Holiday!
Taylor
Taylor, you are truly a gentleman.
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Re: Is there a problem with glidepath (target date funds) for retirement savers?

Post by edge » Sat Dec 26, 2015 8:59 pm

I see no issue with the glide path unless it is a different glide path than the one you want. In my case I want terminal portfolio allocation as 60/40 with different makeup than TR funds but I could see them working for a number of people.

At least way better than the random stuff people pick in their 401ks

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