I’m a stock. You’re a bond. Target-date retirement funds are a pain.

When it comes to retirement planning, sometimes simple, no-brainer concepts take a hell of a long time to catch on. Take “human capital,” for instance. The basic idea is this: Your wealth is not only made up of the cash, stocks and bonds in your portfolio but by your future earnings potential. worker-in-suit-by-steve-woods

So, a 24-year old might be concerned that he only has $10,000 saved for retirement, but can rest easy that he has another $3 million in potential earnings over the course of his career. A 66-year old with only $10,000 in savings would be a little more worried.

“No duh,” you might say.

But let’s take a slightly different scenario. In the first case, take a 35-year old advertising salesman, making $70,000 a year (Note: this is improbably high, but possible). He has $50,000 saved for retirement. His pay is good but unpredictable. Depending on factors outside of his control, like the economy, he might have a particularly good year followed by a string of dismal years.

Next, take a 35-year old tenured professor, making $70,000 a year. He also has $50,000 saved for retirement. As long as his college merely survives, he’ll always have a job and depending on the school’s policies, will always get a moderate pay increase until he retires. He’ll get to work as long as he’d like and can pretty accurately project his income for years and years out.

The ad guy’s earnings are “stock-like” – erratic with possible good and bad years. The professor’s earnings are more like a bond – steady and easily forecast.

Now which of these guys do you think can take more risk in his portfolio? To me, it seems pretty obvious that the ad salesman should save more now and keep more of that money in bonds just in case his earnings take a dive.

But surprisingly, that concept hasn’t really caught on in retirement planning until recently, with the writing of York University professor Moshe Milevsky’s Are You a Stock or a Bond?. To see an interview Money magazine recently conducted with Milevsky, click here.

In my mind, it’s yet another blow to the idea behind target-date retirement funds. The 35-year-old ad salesman might be better advised to get into the target-date retirement 2015 fund (as if he were retiring in his 40s) than to pick the 2040 fund.

And to all you mutual fund companies, I pose this question: Why not just call them what they are? Why not call it a 90% stock/10% bond fund (or 90/10 Fund, 70/30 Fund, etc.) and let the consumer know that he’s going to have to figure out for himself what his proper allocation is or get help?

That certainly beats oversimplifying the most important investment decisions a wannabe retiree will make.

For another post on target-date retirement funds, click here.

– Joe Light

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1 comment so far

  1. the career guy on

    I totally agree! But am I really a stock? hm 😉


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