Agreed, risk is the reason for target retirement fund changes. It is also the reason that endowment funds are not 100% stock even though they have indefinite time frames (longer than your early retiree ; ). It is the reason you can get a home loan at 3%, rather than the bank sinking that money into stocks.
Risk is the reason that in the sort term paying down a mortgage aggressively may be a good financial decision... not just an emotional one.
Risk ladies and gentlemen, is real. : )
Actually,
volatility is the reason why target retirement fund changes. Risk and volatility are often used interchangeably (especially in academics for some reason), but while they are somewhat related they are not at all the same thing.
Acknowledging the usual caveats (an asteroid hits, Chinese invade, etc.) stock market risk is very close to zero, as long as you own a piece of the whole market and have a long holding period. On the flip side, bonds are very risky over long holding periods. That's why financial gurus like William Bernstein recommend never holding bonds greater than five years. You wind up losing your gains to taxes and inflation. Knowing how much money you will have in two or five years is surely a good thing, but you have to pay quite a bit for that certainty.
As an aside, this also relates to another reason why paying down the mortgage doesn't make sense. Let's say you took out a mortgage back in 1985 and dutifully paid it down. You saved a whole bunch of money, right? Not exactly. A 1985 dollar is only worth 45 cents today. In other words, you paid a full dollar now in order to save 45 cents in the future (at least for the last year of the mortgage).*
On the flip side, if you put that same 1985 dollar into the stock market you would have wound up with eighteen dollars today (or eight 1985 dollars, if you prefer). Spending one dollar to save 45 cents is not that great, but spending one dollar to get 18 is pretty awesome. And is spending a dollar to get 45 cents
less risky than getting 18 dollars? Swami says no. Yes, you saved some volatility, but man you paid a high price for it. In a practical and very real sense you took a guaranteed loss in order to reduce volatility.
* Of course you couldn't get a 4% mortgage in 1985, so the example is for illustration only. Also, I'm using only the beginning and end points in my example, so stuff in the middle is less dramatic. Same principle holds though.