Retirement funds are getting beat up in 2022. How investors can cope

Near-retirees who turned to target-date funds to build their nest eggs may want to rethink their retirement planning as stocks and bonds face sharp declines. The S & P 500 , off by about 23% in 2022, is in bear market territory. Bonds are also taking their lumps, with the 10-year Treasury yield rising as high as 3.48% on Tuesday – a level last seen in 2011. Bond prices move inversely to yields. More pain and volatility are likely ahead for both sides of the portfolio as the Federal Reserve continues its interest rate hiking campaign. Target-date funds, a staple of 401(k) plans, aim to take the guesswork out of investing and gradually reduce risk as savers near their retirement date. But even many near-dated funds – including those with a retirement date of 2025 – are seeing double-digit declines this year, as stocks and bond prices fall. “Existing bond portfolios can get hit hard with the Fed raising rates, so it’s not de-risking people as much as you’d think,” said Jamie Hopkins, managing partner of wealth solutions at Carson. Indeed, bond portfolios in target-date funds have a duration of 6 ½ to 7 years, which can expose older workers to bond market sell-offs as they approach retirement, according to Jared Woodard, an investment and ETF strategist at Bank of America. “Bond and stock correlations have turned positive, calling into question the assumption that bonds will always effectively hedge stocks,” he wrote in a report earlier this month. Tweaking allocations Fund families typically make small changes to their allocation each year, but a couple of firms announced updates to their fixed income sleeves before 2022’s bond market havoc, according to Megan Pacholok, analyst, manager research at Morningstar. For instance, BlackRock has based the fixed income portion of its LifePath funds on the Bloomberg Barclays Aggregate Bond Index. Last October, the firm announced that it would break up the aggregate index into its components – U.S. Treasurys of different durations, corporate bonds and securitized assets – and weigh them based on where investors are in their life cycle. Older investors are more heavily invested in government securities, according to Nick Nefouse, head of LifePath at BlackRock. The firm’s LifePath Index 2025 Fund is down about 16% for the year, but small allocations toward different assets – such as commodities and real estate investment trusts – have helped to soften the blow. “They offer some level of hedge to offset some of that risk,” said Nefouse. “Commodities are so sensitive to inflation, and you get an impact in a market like this.” Meanwhile, Fidelity Investments added to its Freedom Funds’ allocation toward Treasury inflation protected securities, particularly for savers approaching retirement and those who have already reached their target date. The funds’ 2025 vintage is down about 21% this year. The move helps savers contend with inflationary stress, said Sarah O’Toole, institutional portfolio manager at Fidelity. “The sources of uncertainty are really unlimited, as we’ve seen in past several years,” she said. “The best tool we have to manage that is diversification.” Managing a bumpy ride Investors who have taken a “set it and forget it” attitude toward retirement saving may need to change tack if they’re near their target date and facing sharp declines. Here are a few starting points. Know what you have: Though all target-date funds have a “glide path” that generally grows more conservative up to the target date, some funds maintain meaningful exposure to equities at and beyond the retirement date. Greater equity exposure gives you the opportunity to keep up with inflation, but it can also carry some volatility risk. Adapt a hands-on mindset for retirement spending: “The mindset has to shift from allocation in investing to spending,” said Hopkins. This could mean working with a financial advisor to develop a strategy to not just invest your savings but to draw it down sustainably. “If you were someone who has been in a target date fund, you might enjoy using a bucketing approach for needs, wants and wishes,” he said. Resist the urge to bail. A rough patch for both equities and fixed income is painful for investors, but fleeing the market now means cashing in when losses are at their worst. “When the market gets a little bumpier, it could be frightening,” said Pacholok. “You might want to make withdrawals, but then you miss the rebounds.”