Investors left exposed by target retirement date strategies

Target date retirement strategies are no longer the most effective way to plan for retirement and could leave investors exposed to increased equity risk.

According to American Century Investments, people could find themselves retiring earlier than expected due to job loss or for health reasons or, alternatively, working longer in order to save the necessary funds to retire.

Whereas retirement used to be a specific date, people were now having a ‘transition phase’ and opting to retire over several years. The 15 years prior to retirement, traditionally around aged 65, were the most crucial as this was when two-thirds of people’s retirement savings were accumulated.

It was crucial, the firm said, that a person’s retirement strategy considered existing savings levels, risk tolerance and demographic factors which would help them accumulate risk-adjusted returns.

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This was particularly important in an era of low interest rates and rising inflation which could erode returns.

Vidya Rajappa, American Century Investments head of portfolio management for multi-asset, said: “It’s a period we deem the ‘transition risk zone’, and retirement strategies with a specific target date often come with a high degree of equity exposure that can inflate this level of risk.

“For this reason, a flatter, more risk aware ‘glide path’ in this zone can help minimise transition risk. Having downside protection during these years better reflects actual risks and investment horizon many investors face. The idea that you set and forget your retirement allocation and stay fully invested until the time you think you’re going to retire is no longer a sufficient retirement strategy.”