5 Questions You Should Ask About Target Date Retirement Funds

May 18th, 2010  |  Published in Investing, Retirement  |  5 Comments

A Target Date Retirement Fund seems like an easy way to save for your retirement.  You just invest your money in the fund that matches your planned retirement date and you are all set.  Of course, investing for retirement is not that easy.  There are several questions you should ask when deciding to use a target-date retirement fund to save for your retirement.

  1. How risky is the fund? –  Not all target-date retirement funds have the same level of risk.  Two funds with a target date of 2025 could have wildly different proportions of equity and fixed-income investments.  You need to decide what is an appropriate level of risk for your goals.
  2. What are the fees? –  Funds also differ on the fees they charge.  Paying too much in fees can seriously affect the performance of your target-date retirement fund.  Make sure you are not paying too much in fees.
  3. How much should you invest?  –  These funds will not tell you how much you need to save for retirement.  You need to figure that out on your own.
  4. Do you have other retirement savings? –  These funds are designed to be your sole retirement investment vehicles.  If you have other retirement savings that will change your investment allocation and you need to adjust accordingly.
  5. What happens when you hit the target-date? – Some of the target-date funds are designed to end when you hit the retirement target-date while others are designed to continue and hopefully provide you with an appropriate return on your money while retired.  Whichever is the case with the target-date retirement fund you choose you need to make sure that your investment will provide you with a sufficient income during retirement.

These five questions are a good starting point when choosing a target-date retirement fund.  Be sure to investigate a prospective target-date retirement fund thoroughly before using it to save for your retirement.

Target Retirement Funds May Not Be Better

May 23rd, 2008  |  Published in Asset Allocation, Retirement  |  Comments Off on Target Retirement Funds May Not Be Better

Conventional wisdom states that you should take risks when you’re younger, become more conservative when you’re older, and your finances will be better off for it. This is embodied in the typical advice for asset allocation – take 120, subtract your age, and you should have that value, as a percent, allocated towards equities in your portfolio. If you’re 20, you should be 100% in stocks. 40? 80% stocks, 20% bonds. Brokerage firms offer funds with this concept in mind, though their implementations vary slightly, by designing target retirement or lifecycle funds to this way. As the years progress, the allocation adjusts itself to meet the “rule of thumb” needs of the age group.

A recent study published in the Financial Services Review, an academic journal, shows that this isn’t necessary any advantage to his approach when looking at real-world portfolio returns. Professors Harold Schleef and Robert Eisinger of Lewis & Clark College ran simulations and discovered that such an allocation offered no advantage because of how random the stock market could be. They picked randomly a 30 year period across 80 years between 1926 and 2006 and created fictitious people with target retirement-like allocations (risky to conservative), seeing which stood the best chance of reading $1M. They found that there was only a 29% chance of making it.

Then they did the reverse (conservative to risky) and saw that there was a 45% chance of getting to a million. Going from conservative to risky was better historically! Of course they warn that you shouldn’t take this information and go all gangbusters but it’s certainly something that is noteworthy.

The Odds for a Retirement Nest Egg, Recalculated [New York Times]

Lifestyle vs. Life-Cycle Funds

May 1st, 2008  |  Published in Investing  |  4 Comments

A Lifestyle Fund and a Life-Cycle Fund are two totally different types of mutual funds, despite the presence of “life” in both of their names. In fact, they are so radically different that to invest in one when you meant the other could be classified as a very bad move.

Life-cycle Funds

Life-cycle funds, or target-retirement funds, are mutual funds that have a future target date and adjust its own risk profile from aggressive to conservative as the date approaches. They’re most popular when used in conjunction with retirement, and first introduced with that in mind, but any target date will work (such as children’s educational expenses). The idea is that when the date is far away, the fund will be more aggressive and have a greater share in stocks. As the date nears and income generation and capital preservation as more important, it’ll shift more and more into safer investments such as bonds and commercial paper.

Lifestyle Funds

Lifestyle funds are like a snapshot in time of life-cycle funds. Lifestyle funds are often known as target-risk, meaning they match the risk profile of the investor (or rather the investor selects the lifestyle fund that matches his or her risk profile). Aggressive investors will want an aggressive lifestyle fund, conservative investors will want conservative lifestyle funds, and the lifestyle fund won’t change its risk profile as the investor ages.

As you can see, lifecycle does not equal lifestyle… and you could be in trouble if you pick lifecycle when you meant lifestyle. 🙂