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Shifting Targets: Why Managed Investments Might Suit Pre-Retirees

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May 16, 2018
Hitting the target: managed portfolios and target date funds.
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Young employees come in a variety of shapes and sizes, but they tend to have something in common: their financial situation. Most young people are just beginning to build their savings and have decades before retirement. They also tend to have minimal investment knowledge.

That’s why many employers often include target date mutual funds in their retirement plans as the default investment option. Individuals who don’t want to create their own portfolio can choose the target date fund that matches the year they expect to retire. For example, someone age 25 today might choose a 2055 target date fund. These funds tend to start with a more aggressive approach to help young people build their stash, and become more conservative over time to help mitigate the higher risk of stocks as retirement nears. For some investors, however, as years pass and lives change, an approach that utilizes investment management might be more appropriate.

A lot can happen as we move through our 30s and 40s, and a one-size-fits-all target-date strategy based solely on age might not be the right approach. While retirement is probably the main goal for most of us, our ideas about when to retire and how to live in retirement can vary quite a bit and affect how we invest. Additionally, our lives take different paths from our peers, so a fund that works for a colleague might not be right for you at a certain point.

Three People, Three Different Retirements

For example, consider three co-workers currently age 50 who when they first joined their employer’s plan expected to retire at age 65. Based solely on this, all of them might have selected the plan’s 2030 target date fund because it met their investment needs at the time. Over the years, as their lives evolved so did their goals and visions for retirement:  

  • Frank, a mid-level employee still plans to retire at 65 and is currently in great health. He’s concerned about running out money and having sufficient savings to cover future medical expenses. 
  • Val, a senior executive, loves her job and now has no plans to retire before age 70. She also wants to pass the majority of her wealth on to her children.
  • Pete, a manager, wants to retire early at age 60 so he can travel. He also wants to purchase a second home.

As a result, the 2030 target date fund, with its increasingly more conservative asset allocation, may no longer be the right choice for one, two, or all three of them. It’s for this reason, employers are starting to consider what some call “tiered defaults”—target date funds for younger employees, and actively managed accounts for people ages 50 and older.

Keep in mind there’s nothing inherently wrong with staying in a target date fund as you age. However, you may want to consider utilizing an approach more oriented toward managed investments if you want a portfolio that’s more tailored to the life you want to live.

Why a Managed Portfolio Might Make Sense

With a managed portfolio that utilizes a managed investments approach, you create a financial profile based on your goals, risk tolerance, time horizon, and investment preferences. From this profile, investment professionals recommend a basket of securities that reflects your unique situation. 

The basket can include a wide mixture of investments, from actively-managed mutual funds that may be rebalanced often, to passively-managed funds designed to mirror the performance of a broad-based index. Some portfolios, for example, are weighted toward fixed income investments, with less exposure to stock market volatility. Others, such as the Selective Portfolios offered by TD Ameritrade Investment Management, LLC, take a more tactical approach to portfolio allocation and diversification.

"Managed portfolios are about employing different investment strategies to suit a range of needs," said Keith Denerstein, Director, Guidance Product Management at TD Ameritrade. "They can be particularly useful for people who don’t have the time or resources to constantly monitor the markets.” Investment professionals provide ongoing account management, to help your goals and portfolio stay in sync. A managed portfolio approach might mean selecting the appropriate asset allocations for each portfolio, helping you with rebalancing, and employing strategies that could potentially reduce your tax liabilities.

Making the Switch

So how do you know if you should consider moving out of a target date fund and into something more customized for your own personal experience and needs that utilizes an investment management approach? First, you may want to check the fund’s current asset allocation. If it no longer seems to fit your situation, then you need to decide whether you want to manage your investments on your own or with help. Based on your answer, a managed portfolio might be a solution for you.

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