Target date funds (TDFs) were last tested in 2008, when they failed to protect, losing more than 30%. 2022 could be the next test, and the indications are that TDFs will fail again, but this time there’s $3.5 trillion at stake, versus $200 billion in 2008.
The bottom line, most TDFs are taking too much risk at the target date, as shown in the following summary:
TDFs are invested 85% in risky assets at the target date – 50% in equities plus 35% in risky long-term bonds.
But there are safe target-date funds. The Federal Thrift Savings Plan (TSP) and the OPEIU (Office Professional Union) are examples.
Here’s how these two groups (Industry and Safe) have performed so far:
Beneficiaries who are near retirement are invested in the 2020 Fund that has lost 13.9% so far this year unless you’ve been protected by the TSP or OPEIU, in which case you’ve lost only 4.3%.
2022 might be a repeat of 2020 with its V-shaped recovery, but many believe it’s the beginning of a crash that will be worse than 2008.
Those near retirement cannot afford to speculate. They need to move to safety now.