Thread: Smoothing the road to retirement

Smoothing the road to retirement Targeted maturity funds try to meet all needs

By Jonathan Burton, MarketWatch Last Update: 10:46 AM ET June 16, 2005

SAN FRANCISCO (MarketWatch) -- A new breed of specialized mutual fund may offer investors some protection against the next bear market as they save for a comfortable retirement.

Target retirement funds, also known as life-cycle or target maturity funds, take less risk with stocks and add conservative bonds as an investor nears retirement. In retirement, these funds give greater prominence to income-producing bonds.

Investors who anticipated retiring in 2000, for example, but instead were broadsided by the bear market, might have benefited from target retirement funds.

"If a bad bear market hit the year before you retired, if you were in a target retirement fund, your asset allocation to equities would have been greatly reduced," said Jana Thompson, a senior vice president at Charles Schwab Investment Management. "That provides a cushion."

Target retirement funds are geared to workers at various stages of life, but all seek a one-stop solution to a widespread problem: Ensuring a comfortable retirement.

Americans aren't putting away enough money to achieve their retirement goals. On that point, there's broad agreement. The big question is how to encourage people to save more.

While about 70% of U.S. workers have stashed away money for retirement, half of them have less than $25,000 set aside, according to an Employee Benefit Research Institute survey.

Moreover, workers who aren't participating in employer-sponsored retirement plans say they'd be more likely to contribute to an investment vehicle that automatically becomes more conservative as they approach retirement, the survey noted.

Accordingly, U.S. fund companies such as Fidelity Investments, T. Rowe Price Group, the Vanguard Group and Charles Schwab & Co., among others, have launched versions of the life-cycle strategy. Nowadays the earliest retirement funds mature in 2010, with others offered in five- or 10-year increments up to 2045.

While most of these funds are not much more than a year old and performance records are short, they've been generally well-received.

"For folks who aren't necessarily interested in figuring appropriate asset allocation and which managers, it's certainly a good way to go," said Kunal Kapoor, director of fund analysis at investment research firm Morningstar Inc.

He cited modest cost, broad diversification and exposure to some of a fund family's top managers as compelling reasons to own target retirement funds.

Target retirement funds are so-called fund of funds, which invest in several of the sponsoring firm's stock and bond portfolios. The funds maximize capital appreciation for investors with long horizons until retirement, while income is emphasized for older investors.

Someone who intends to retire around 2040, for example, can expect a fund to earmark around 80% to stocks and the remainder to bonds. With so much time, the focus is chiefly on capital appreciation.

"You should be able to withstand some of the inevitable volatility that comes in the market," Thompson said.

For those within a decade or so of retirement, the stock-bond percentage generally would be closer to 60-40. The stock portion gradually declines to about 20% over a 30-year span after retirement.

"In retirement, you're still going to want some element of growth in your portfolio as you siphon more income," Thompson added. "We want to focus on the capital preservation side once you stop working."

Investors should be aware that not all life-cycle funds are alike. Some funds take more risk than others. The trade-off is straightforward: Stocks can provide a larger retirement nest-egg but are more volatile -- especially smaller-capitalization shares. Bonds are relatively safer but lack stocks' long-term punch.
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Jonathan Burton is MarketWatch's investments editor, based in San Francisco. see attached for more info