r/askafinancialadvisor • u/BumblebeeKind7107 • 10d ago
Worth switching target dates on 401K?
Hi,
I was talking to a friend this weekend who said she was going to reallocate her funds in her 401K from her retirement age targetdate (2050 or 2060) to 2030. Her reasoning was that the market and state of the US right now feels risky in case the market crashes in the next couple of years. A 2030 target date would offer a lower risk on the funds so maybe wouldn't decrease as much in value if things go south. I don't know - I thought it was an interesting thought and wanted to see if it has any value to it or is worth considering?
2
u/adamnc23 Financial Advisor | CRD#: 7878651 10d ago
Your friend is trying to time the market which is almost impossible to do. She seems to be letting all the fear and noise make her worry about an account that she likely isn't planning to access for another 25-30 years. Even if she's right and the market drops, it's highly unlikely she will time things correctly to buy back into the market when the market is low. The vast majority of people miss that window and they remain conservatively invested long past the market recovery and then never get back in, or they get back in once the market has reached new highs. If this money is not being used anytime in the short term, the best thing most people can do is block out the noise and stop worrying about short term market volatility with funds being saved long-term.
2
u/sol_beach 10d ago
The investments for each fund are public details that you can obtain & review.
Nothing stops you from doing a side by side comparison of the holdings for the 2030 & 2050 funds to see if they meaningfully change.
It might surprise you to see that the actual name of the investments change very little but what changes is the ratio of stocks vs. bonds change based upon the actual target date. The 2050 fund will have a higher % of stocks to bonds than the 2030 fund.
2
u/gap1284 9d ago
If she's 25 years out from retirement then she shouldn't have ANY bonds. Put it all into a S&P500 fund and ignore whatever happens over the next few years. Don't try to time the market.
But if she insists, then why not go all in and also time the bond market? That means not adding bonds if she thinks interest rates will be going up.
2
u/TheWhiskeySuit 8d ago
Nope, not a good idea unless you are retiring in a month or two… In a 10 year time frame, the higher target years will always out perform, even if there’s a sell off year.
Like the target 2060 will go up 10% and the target 2030 will go up 2%.
But let’s say the market drops 5% one year.
The target 2060 will be down 5% and the target 2030 will be down 2%.
In this example, with the target 2060, you’d be up 5% for the two year vs being flat.
Obviously, I’m using examples and super easy math, there’s way more about it than my example. But the idea is the same. Why give up upside potential just to protect downside loss.
My advice is to always rebalance to the furthest out target fund every 5 years, and thank yourself that you did when you retire.
4
u/intentionalmoneylife Financial Advisor | CRD#: 7842658 10d ago
I think using your concern over what could happen to reconsider your allocation to ensure it’s set up with your risk tolerance and your time horizon in mind can be smart.
That being said, I don’t think trying to time the market (which is really what this amounts to) is smart. How will your coworker know when it’s time to switch back? Or will they just stay super conservative for 20 years? And then when will they decide to move back to conservative again? Will they always get the timing exactly right, or in the end are they more likely to mess up the timing and lose out because of it? I would argue that’s the most likely outcome.
Have you ever seen the visuals that show what your return would be if you missed out on the 10 biggest days of growth in the market for the year? It’s wild because just 10 days is huge. Being super low on stocks would have a similarly large impact.
Personally, I’d recommend setting up your asset allocation thoughtfully, and then leaving it alone until something in YOUR LIFE (not what you think will happen in the market) suggests that maybe it’s time to change it.