Suze Orman Rejects Age-Based 401(k) Target-Date Funds
Suze Orman rejected the age-based formula behind target-date funds, saying the default 401(k) mix should be driven by needs and the economy, not by a birthday. She said many savers are already in those funds through automatic enrollment, which makes the stock-to-bond glide path a practical decision, not an abstract one.
Orman On Target-Date Funds
"When people ask me whether target-date funds are a good investment, my answer is simple: They're built on assumptions I don't agree with." Orman, host of the Women & Money podcast, said target-date funds assume investors should make decisions based on age. "Target-date funds assume you should invest based on your age. You shouldn't. You should invest based on your needs and what's happening in the economy."
Target-date funds set the stock-to-bond ratio using years to a stated retirement date, but Orman said that leaves out the yield curve, pension status, spending needs, and whether bonds are a good deal in a given month. The gap matters most for workers who never chose the fund in the first place and were placed there by default.
Bond Yields Near 4.6%
The 10-year Treasury yield sits near 4.6%, close to the high end of its 12-month range and above 4.0% in February. The Fed funds rate is near 3.8%, after reaching 4.5% last September, while CPI stands at 332.4 versus 320.6 a year ago.
A typical intermediate bond fund with a duration of about six years loses roughly 6% of principal value for every 1 percentage point rise in rates. That leaves a 2030 target-date fund with half its money in bonds exposed to the same interest-rate math Orman is warning about, even before the investor nears retirement.
What A 2030 Fund Holds
A 35-year-old in a 2055 target-date fund holds roughly 90% stocks, while a 60-year-old in a 2030 target-date fund faces a portfolio that is half interest-rate sensitive. Vanguard and Fidelity publish target-date fund holdings on their fact sheets, so investors can see how quickly the stock-and-bond mix changes as the stated retirement date gets closer.
A 62-year-old with $500,000 in a 2030 target-date fund at a 50/50 split could lose around $15,000 of principal if long rates climb another 100 basis points (hundredths of a percent) over the next year. The same investor could buy a 10-year Treasury today yielding nearly 4.6% and hold it to maturity for a known return.
Orman's Next Step
Orman said investors should list guaranteed income using the SSA.gov estimator for Social Security and add any pension or annuity before deciding how much risk to take. If duration is above five years, investors know their interest-rate exposure; if the bond sleeve is shorter, the rate sensitivity is lower, but the fund still follows the age-based path she rejects.
