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Let’s Talk Glide Paths

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Mapping Your Journey to Retirement

When it comes to target date funds, one of the biggest decisions you’ll make is choosing the right glide path. The glide path is like a roadmap that shows how your investment mix will shift over time as you approach and enter retirement. It determines how much risk you’ll take on and what kind of returns you might see, presenting a picture of how the fund’s equity exposure changes over your lifetime.

Understanding the difference between “To” and “Through” glide paths is key. The biggest distinctions come into play in what I call the “Retirement Red Zone” – the 10 years before and after your retirement date. I illustrate with some of my favorite Target Date fund series.

The “To” Glide Path: Winding Down for Retirement

Funds like the MFS Lifetime series us a “To” glide path. These are designed to shift your asset allocation to a more conservative investment mix by swiftly reducing stock exposure by the time you reach your target retirement date. This approach aims to preserve capital and mitigate risk as you near retirement. It’s similar to a football team strategically running down the clock in the final quarter to protect their lead. The landing point – when your mix locks in – coincides with your target retirement date.

Pros:

  • Reduces risk in the ‘Retirement Red Zone’. This helps to protect your nest egg from potential market volatility and the potential of sequence of return risk.
  • A more aggressive equity allocation in the early years of the accumulation phase has the potential for higher returns when your nest egg is focused on growth.

Cons:

  • May limit returns in retirement due to a more conservative asset allocation at and after the target date.
  • The conservative equity positioning may not provide sufficient long term growth after retirement to combat inflation and longevity risk during a long retirement.

The “Through” Glide Path: Prolonging the Journey

On the flip side, a “Through” glide path extends beyond the target retirement date, recognizing that retirement is just the beginning of a new chapter. That’s like a team continuing to play aggressively even after taking the lead. Most Target Date series, including the American Funds Target Date Retirement series, use this approach and have a landing point many years after retirement.

Pros:

  • Provides continued risk management and growth potential during retirement.
  • Higher equity allocations early in your retirement years can provide the growth necessary to combat inflation and longevity risk.

Cons:

  • Potentially exposes your portfolio to higher equity risk in the ‘Retirement Red Zone” when preservation of capital may be a higher priority.
  • An aggressive equity allocation exposes your portfolio to potential large losses in a bear market late in life that could severely impact the longevity of your investments.

A Few Words About Passive Index Approach to Glide Paths

If keeping costs low is a top priority, passive index target date funds like the Schwab Target Index series or the State Street Target Retirement series offer diversified market exposure at a lower cost than active funds. While passive strategies lack don’t adjust to market conditions, they do provide consistent market tracking and broad diversification, making them suitable for many investors. However, from my perspective, it’s important to remember the adage “you get what you pay for” – active management may deliver higher net returns over the long run.

Active vs. Passive Investment Management

The age-old debate between active and passive management rages on. In my experience there are some investments where active managers can add value, while in others passive index approaches make sense. The managers running active series like American Funds Target Date Retirement series or MFS Lifetime series can dynamically adjust allocations, potentially providing higher returns but at a higher cost. Passive index series like Schwab Target Index series or the State Street Target Retirement series offer diversified market exposure at a lower cost but without the potential benefits of active management. Target Date funds are one investment area where active managers often do add value.

Choosing Your Glide Path: A Balancing Act

The ideal Glide Path for you depends on your individual circumstances, risk tolerance and retirement goals. Here are some considerations to help guide your choice:

Choose a “To” Glide Path if:

  • You are risk-averse and you want to prioritize capital preservation and stability nearing retirement.
  • You have a clear idea of your retirement income needs and have other sources of income including Social Security, pensions, or annuities.

Choose a “Through” Glide Path if:

  • You have a high risk tolerance, are comfortable with some market volatility, and expect a long retirement.
  • You prioritize growth potential alongside income generation throughout retirement.

Choosing ‘Your’ Target Date

Most of you have access to a Target Date Fund in your 401(k) or 403(b) defined contribution retirement plan. While you may not be able to choose your Glide Path in your company plan, there are a couple of tweaks you can make the personalize your experience rather than accepting the default target date closest to the year you turn 65.

First, consider your actual planned retirement age. If you plan to retire earlier or later than 65, it may be wise to choose a fund with a target date that most closely aligns with your anticipated retirement timeline. If you plan to retire at 62 or earlier select the fund with a target date 5 years earlier. On the other hand if you plan to max out Social Security and retire at age 70, then choose a fund with a target date 5 years later.

Then evaluate your risk tolerance. In a similar way to your retirement date adjustment, if you are risk-averse and would prefer a more conservative glide path than the one available to you in your retirement plan, choose a fund with a target date that is 5 years earlier than your planned retirement date. On the other hand, if you feel the glide path of the fund on your retirement plan is not aggressive enough, choose a fund with a target date that is 5 years later than your planned retirement date.

Have you got all that? After considering these factors you may decide to choose the fund that has a Target Date that is 10 years before or 10 years after you would have been assigned based on the year you will turn 65. This approach ensures that the glide path is being used in a way that is suitable for you.

Glide Paths are a Journey, Not a Destination

At the end of the day, your glide path choice should align with your investment goals, risk tolerance, and retirement income needs. It’s essential to consider factors such as your desired lifestyle in retirement, potential longevity, and the role of other income sources like Social Security and pensions.

By understanding the intricacies of “To” and “Through” glide paths, as well as the potential landing points for “Through” glide paths, you can make an informed decision that aligns with your unique circumstances and investment objectives.

Remember, a Target Date Fund is a powerful tool, but it’s just one piece of your overall retirement plan.

Target Date

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Target Date Funds Can Be Your Winning Play for a Fun-Filled Retirement

What are Target Date Funds?

A target date fund (TDF) is much like having an investing coach to help you win the retirement game. These mutual funds automatically adjust your portfolio’s asset allocation over time based on a selected target retirement date, usually age 65. As you near retirement, the fund shifts to more conservative investments to reduce your exposure to market risk. It’s a convenient “set it and forget it” strategy.

How Do Target Date Funds Work?

Picture your retirement journey as a marathon race. Target Date Funds follow a stock “glide path” over time. “To” glide paths sprint to the finish line, quickly adjusting asset allocation to a conservative retirement portfolio at the target retirement date. “Through” glide paths, on the other hand, take a steadier approach. They reduce stock allocations gradually for several years after your reach your retirement finish line. These funds are geared for you to have a longer fun-filled retirement.

Target Date Funds use different approaches to winning the retirement game, just like sports teams. Active fund managers shift assets aiming for big plays to outperform the market. Passively managed funds mirror market indexes while keeping fees low. Hybrid funds mix it up, like all-around athletes in the Olympic decathlon by aiming for a sweet spot between cost and performance.

A key benefit of Target Date Funds is built-in diversification across stocks, bonds, real estate and more. This approach acts as a shock absorber against stock market swings. Just like playing defense in sports, managing risk is essential in Target Date Funds. However, some TDFs spread risk better than others through greater diversification so it’s worth comparing asset allocations between fund families.

Target Date Funds and Your 401(k) or 403(b)

Your 401(k) plan likely offers Target Date Funds as a default option. If you don’t choose your own investments, your money automatically lands in the fund closest to the year you’ll turn 65 – your ‘default’ retirement date. While TDFs are a convenient “set it and forget it” approach for those who prefer off-field pursuits, they may not fully align with your risk tolerance and personal retirement goals.

Pros and Cons of Target Date Funds

The advantages of using Target Date Funds include simplicity, professional management, diversification, and gradual reduction in risk over time as you get closer to retirement. It’s like having a coach handling your retirement game plan. However, the drawbacks center around the one-size-fits-all approach, limited investor control, and varying fees.

Selecting a Target Date Fund

Choose a TDF that uses a style that fits your risk tolerance and aligns with your comfort zone. When selecting a TDF, weigh factors like the equity glide path details, historical performance and consistency, risk exposure and fee structure. The goal is finding the best fit target date fund for your situation at a reasonable cost. Sometimes, it pays to have a good coach.

The Bottom Line: Scoring Big for Your Financial Future

Target date funds simplify investing for retirement by automatically adjusting diversified portfolios as you get closer to retirement. TDFs deliver a strategic game plan for retirement, with the potential to score big points for your financial future. Like a seasoned athlete, TDFs adapt to changing conditions, helping you stay in the game and achieve your retirement goals. So, if you’re not up for choosing your own investments, let a Target Date Fund take you on a winning journey toward a fun-filled retirement.

For a more in-depth look at Target Date Funds click over to our Target Date Funds Page. I’ll write about some of my favorite Target Date Funds in future posts.

Saving for Retirement

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A Fun Guide on Saving for Retirement

Do you daydream about retiring early and traveling the world? Or are you worried you won’t have enough money saved to ever retire at all? Either way, planning for retirement may seem boring or stressful. But it doesn’t have to be! This fun guide breaks down the most common retirement accounts, how to optimize them, and tips to help you save for the future retirement of your dreams.

Tax-Advantaged Accounts to the Rescue

First things first, you’ll want to take advantage of accounts that give your savings a little tax break to grow faster. With 401(k)s for private sector employees and 403(b)s for non-profit personnel, you can score big by contributing pre-tax dollars straight from your paycheck. It’s like intercepting a portion of your income before it even hits your bank account. Plus, many employers offer matching contributions, which is like getting a bonus touchdown pass thrown right into your retirement fund!

Whether you have a retirement savings plan at work or not you may also want to contribute to an IRA (Individual Retirement Accounts). These accounts come in two flavors: Traditional and Roth. Traditional IRAs are like playing the long game, deferring taxes until you make withdrawals in retirement. On the other hand, think of Roth IRAs as your short game where you pay taxes upfront but enjoy tax-free withdrawals down the road.

Maxing Out Contributions

Want to supercharge your retirement savings? Aim to max out your contributions to your employer-sponsored plan and IRAs. Just like professional sports teams have a salary cap when building their rosters there are limits to the amount of money you can stash away in retirement accounts. Please note that you may not be able to contribute to an IRA if you are covered by a workplace retirement plan. Your eligibility phases out starting at $77,000 for single taxpayers and $123,000 for married couples filing jointly.

401(k) Plans:

In 2023, the contribution limit for employees participating in 401(k) or 403(b) plans was $22,500. That limit increase to $23,000 in 2024.

Traditional and Roth IRAs:

In 2023, the annual contribution limit for IRAs was $6,500 for individuals under the age of 50. That limit increase to $7,000 in 2024.

Catch-Up Contributions:

For you veteran players, individuals aged 50 and over, the catch-up contribution limit of $1,000 for IRAs in 2023 is holding steady in 2024.

Same thing for employees aged 50 and over participating in 401(k) or 403(b) plans. The catch-up contribution limit sits at $7,500 for 2023 and 2024. Therefore, participants in these plans who are 50 and older can contribute up to $30,500 starting in 2024.

Consistency is Key

Championship dynasties are built on consistent coaching and player development over time, not quick fixes. By setting up automatic contributions every month you steadily build your investment portfolio. Compounding works like athletic training – today’s small fitness gains accumulate into huge performance ability over years of focused effort. The key is continuing to invest regularly because market drops mean your ongoing contributions buy more shares. This allows you to ride the next wave back up over long periods of time. Taking advantage of compound growth and down markets sets your savings up for success.

Keep Your Eye on the Prize – Retirement Readiness

Don’t wait until the two-minute warning to start saving for retirement. Time is your biggest ally when it comes to building wealth. Even small contributions can grow into a retirement touchdown thanks to the magic of compound interest. So, lace up those cleats and start socking away cash as soon as possible. Your future self will thank you for it!

What does your dream retirement include? Picture yourself already there, living life on your own terms, as you take small steps today to make that a reality someday. Remember, retirement savings is a marathon, not a sprint. So, find a strategy that works for you, stay disciplined, and keep your eyes on the prize – that retirement freedom where every day feels like game day!

Turbocharge Your Retirement Savings in 2024

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Secure Act 2.0 and Inflation Indexing

Secure Act 2.0 unleashes several key changes directly benefiting individuals like you. If you’re a fan of boosting your savings game, here are some game winning strategies. We will dive into the key changes that are set to redefine the retirement landscape in 2024 and beyond, but before we dive into the game-changers we will highlight the contribution limit increases already on in play thanks to the annual inflation adjustment.

Inflation: Growing Your Nest Egg Faster

Inflation isn’t just affecting your grocery bills; it’s also giving your retirement savings a boost! Here’s how inflation-indexed contribution limits for 2024 benefit you:

Traditional and Roth IRAs: Score big with a $7,000 touchdown this year, up from $6,500 in 2023. That’s an extra $500 to turn your retirement dreams into reality. In addition, if you are 50 and over still in the game, you can make a ‘Catch-Up’ contribution of $1,000. There are some limits on IRA and Roth IRA contributions based on your income, in particular if you are covered by a retirement plan at work, depending on your individual circumstances. More information on a potential curveball is available at the IRS website.

401(k) and 403(b) Plans: Max out at $23,000 in 2024, a jump from $22,500. Every dollar counts when compounding over time! And, if you are 50 and over, bring out the ‘Catch-Up’ play with an additional $7,500 contribution.

Secure Act 2.0: Revolutionizing Retirement Savings

This legislation isn’t just a catchy name; it’s a game-changer for your retirement journey. Let’s unpack the exciting additions:

Catch-Up Contributions on Steroids: Feeling behind in the game? Starting in 2025 ‘Catch-Up’ contributions for people aged 50 and over and still in the game will be indexed for inflation in IRAs and Roth IRAs too. And 2025 brings a turbo boost to retirement plan savings by raising the bar even higher for people ages 60-63 to a whopping $10,000 in 401(k) and 403(b) plans. Time to bridge the gap faster and level up your retirement savings game.

Roth 401(k) RMDs? Not Anymore! Love the idea of tax-free retirement income? Secure Act 2.0 makes it a reality by kicking mandatory distributions (RMDs) out of your Roth 401(k). Your money can grow tax-free, and you can pass it on to future generations without limitations. A game winning touchdown for generational wealth!

Later RMDs, Longer Growth: Secure Act 2.0 has already pushed the trigger age for Required Minimum Distributions (RMDs) to 73. It increases 75 for 2033. This translates to years of additional tax-deferred compounding, potentially boosting your long-term retirement income.

Oops, Missed an RMD? No Panic! Life happens, and sometimes RMDs slip through the cracks. Secure Act 2.0 understands! The penalty for missing an RMD has been reduced to 25%, with further reduction to 10% if you correct the oversight within a reasonable timeframe, however the IRS defines as ‘reasonable’. A breather for unintentional oversights – we’ve all been there.

Annuities on the Move: Need flexibility with your retirement income? Annuities are contracts that provide a stream of income for a specified period or for life. Starting in 2024, you will be able to transfer annuities without tax consequences or surrender charges. If your current retirement plan has an annuity option for retirement income you will now be able to easily roll it over into a plan sponsored by your new employer. This will enhance the portability and availability of annuities for retirement income.

Small Business, Big Benefits: Don’t work for a corporate giant? Worry not! New “Starter 401(k) plans” make offering and participating in retirement plans more accessible, even for the little guy. Secure your future, even if you’re the sole player on your team!

Your Next Steps: Seize the Moment!

With all these changes (and this is just the highlight reel), how do you navigate and maximize your retirement advantage? Feeling a bit overwhelmed? No worries, you can always consult a financial advisor – consider them your seasoned coach. Otherwise, subscribe to our newsletter, and I’ll be your guide through this retirement adventure. Remember, staying informed and taking control of your journey are the power moves for securing your financial future. Get ready to save and invest for a fun-filled retirement – it’s your time to shine on the retirement field!