American Funds: Keep Target Date Funds on Target
American Funds portfolio manager Brad Vogt explains the importance of the right target date series to help investors pursue their retirement goals. Beyond the glide path, a good evaluation process should include an examination of the underlying funds and the purpose each serves over the long-term.
We have a “through” glide path. We manage it all the way through 90 years old. And it does have more equity at retirement than most glide paths. But if you look at what those equities are, the dominant equities at that age in our glide path are funds like Capital Income Builder, Income Fund of America. So while they’re higher equity from a simplistic level, they’re actually creating the right balance of risk and return, longevity risk and market risk. And what we’ve seen, interestingly, is that the 65-year-old portfolio in our through glide path often performs better in sort of a risk-adjusted situation versus some “to” glide paths — even though it has higher equity — because its equities are much less volatile and higher income. And because of that, the bond portfolio can be more stability-/preservation-oriented. So you really have to look under the hood and get past the simplistic, what are the stock, bonds and understand what are you really owning. There are two million 90-year-olds in the United States. That’s tripled in the last couple of decades. The Census Bureau thinks it’s going to quadruple. So, you know, people haven’t saved enough; Social Security’s not going to be there, bonds are at 2%. If you’re at 65, and you’re going to have a 30-year retirement, and you want to keep up and you maybe want to help your grandkids go to college and leave something for people — not just spend it all — you can’t just have a flat-line ultraconservative glide path. It’s not responsible. So you need to be investing in the right kind of equities that have enough yield and dividend growth that help you keep pace with inflation.
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The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings. Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds.
Each target date fund is composed of a mix of the American Funds and is subject to the risks and returns of the underlying funds. Underlying funds may be added or removed during the year. Although the target date funds are managed for investors on a projected retirement date time frame, the funds' allocation strategy does not guarantee that investors' retirement goals will be met. The target date is the year in which an investor is assumed to retire and begin taking withdrawals. American Funds investment professionals manage the target date fund's portfolio, moving it from a more growth-oriented strategy to a more income-oriented focus as the fund gets closer to its target date. Investment professionals continue to manage each fund for 30 years after it reaches its target date.
Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries.
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