A Second Opinion on Retirement Asset Allocation


"Am I on the right track?"

That's a common question among Morningstar.com readers. Many of you have thoroughly researched your investments and taken care in setting up your asset-allocation plans. But even if you're comfortable with your investment program, it's normal to want to seek outside opinions to corroborate that you're doing the right thing. That reassurance can be particularly helpful in the realm of retirement planning, where there's little room for error.

A professional financial advisor--ideally, someone serving in a fiduciary capacity--can help with customized in-retirement guidance, of course. But target-date funds are another way to backstop your retirement plan, enabling you to compare your own portfolio with those crafted by large money managers.

Some financial advisors disparagingly call target-date funds "one size fits none." I'd point out that financial advisors have a vested interest in pooh-poohing target-date funds, but I'll also acknowledge that there's something to that criticism. Any off-the-shelf financial instrument such as a target-date vehicle couldn't possibly address the myriad variations in individuals' financial and life situations, particularly when someone is getting close to retirement or already in it. After all, the investment needs of a 65-year-old with $2.5 million in retirement assets and a pension in retirement are probably going to be a lot different than those of another 65-year-old who hasn't saved much at all.

Nonetheless, surveying target-date funds can help provide yet another source of information for those managing their portfolios before and during retirement. I recently investigated the universe to see how the near-dated funds--those geared toward people who are already retired or getting ready to--had allocated their assets among stocks, bonds, and cash.

A Range of Allocations
Perhaps not surprisingly, I saw some big variations in asset allocations among the various plans, underscoring a key philosophical difference in the realm of retirement planning and asset allocation.

Morningstar's Target-Date Fund Series reports do a good job of summarizing the glide paths (the changes in asset allocation over time), as well as the pros and cons of various target-date series. Some target-date programs maintain very high equity allocations before and even during retirement, a stance informed by the view that longevity risk--that is, the chance that you'll outlive your assets--should outweigh concerns about short-term fluctuations in an investor's principal. The T. Rowe Price Retirement 2015 (TRRGX) fund, for example, has nearly 60% in stocks currently, versus an average stock weighting (U.S. and non-U.S.) of 43% for funds in the Target Date 2011-2015 category. (That comparison may overstate the T. Rowe fund's relative aggressiveness, given that some funds in this category are geared toward people who retired in 2011.)

Other target-date fund series have steered a more conservative course, in the view that big stock weightings add more volatility than most need or want, which in turn could lead to panic-induced selling amid stock-market downturns. The equity allocations in American Century's One Choice target-date fund series, for example, are lower than the industry average up to the retirement date. Morningstar target-date analyst Josh Charlson notes that "the broad risk-averse orientation is supported by other features of the series' design, such as reducing the proportion of small-cap and emerging-markets exposure as the glide path ages."

Gathering a Consensus View
If you're not sure which side to come down on, you may find it helpful to look at the category average weightings in each asset class in an effort to arrive at target date funds' "consensus" view of appropriate asset allocations for those in or nearing retirement.

Additional Considerations
While off-the-shelf asset-allocation guidance like this can help you assess your own in-retirement and preretirement asset allocation, it's just one of many sources of information that you can turn to when setting your stock/bond/cash mix.

Whether you use a financial advisor or manage your investment portfolio on your own, it's crucial to consider your own set of circumstances to arrive at an asset-allocation framework that truly fits your needs. Among the factors that could affect your in- and preretirement asset allocation are your desire to leave a legacy, other sources of income you can rely on in retirement, the longevity history of your own family, your savings rate, and the size of your retirement portfolio.

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