How Much Stock Is Too Much in Retirement?

Look under the hood, though, and you’ll find that Vanguard’s target-date funds are actually a collection of low-cost, broad-based index funds, with holdings in a variety of domestic and international stocks and bonds. For large workplace plans, these investments are not mutual funds but, technically, collective index trusts, which are generally cheaper than mutual funds, with pricing negotiated with individual companies. (For example, the standard Vanguard Target Retirement 2030 Fund has an expense ratio of 0.14 percent, which Vanguard will lower to about 0.08 percent in February. That compares with 0.065 percent in expenses for the equivalent offering in The New York Times 401(k) plans.)

Until now, you could disregard the strategies powering the funds. All you had to do was decide which target-date fund most closely matched your likely retirement date — they are categorized in five-year increments, ranging, at the moment, from 2015 to 2065, with the 2070 fund emerging shortly — and Vanguard would make adjustments for you gradually as you approached retirement. The Vanguard Target Retirement 2065 Fund, for example, contains more than 90 percent stock and less than 10 percent bonds.

The funds attain a 50 percent stock allocation at the designated target date, say 2030, and for seven years, the allocation declines until it reaches 30 percent in the Vanguard Target Retirement Income Fund for retired investors. That’s the current setup, which will continue to be the default in workplace plans.

But this year, Vanguard is introducing a new fund, the Vanguard Target Retirement Income and Growth Trust. At the target date, a retiree’s investments would flow into that fund, which will never drop its equity proportion below 50 percent, Nathan Zahm, head of goal-based investing research at Vanguard, said in an interview. “This fund is right for some people, those who can handle more risk and can afford to do so,” he said. “But people will need to think carefully about it.”

The company’s research shows how the two different equity allocations would have affected a retiree with a portfolio of $1 million from 1990 to 2020, based on the performance of the markets tracked by the indexes represented in Vanguard’s current array of funds. The 50 percent stock fund would have had annualized returns of 7.3 percent versus 6.6 percent for the 30 percent stock fund. That amounts to $7,000 extra each year for the fund with more stock, which the retiree could have spent or salted away.

But the greater risks associated with stock investing were also apparent. The biggest loss in any 12-month period for the fund with more stock was 28 percent, compared with 17 percent for the traditional income fund. If those declines occurred in the first year of investing, the $1 million portfolio would have had a whopping loss of $280,000 compared with a $170,000 decline for the bond-heavy fund. Clearly, unless you are capable of withstanding the greater loss, you should not risk the 50 percent stock fund.

It’s easy to contemplate hefty stock investments when the market has risen for years. But if you need to stop working just as the stock market falls — which happened to many people in 2008, when the S&P 500 dropped more than 38 percent — target-retirement funds will generate painful losses with either allocation.