Target retirement funds are mutual funds that do it all for you … one stop shopping. You tell them when you plan to retire, and they manage your money in a diversified investment portfolio that gets more conservative as your retirement date approaches. Once you retire, your money is managed conservatively for you.
That’s their story, and unfortunately they are sticking with it. I suggest you look before you leap. Your idea of conservative might differ from theirs. For example, let’s say that you plan to retire in 5 to 10 years. What percent of your retirement nest egg do you want at risk in the stock market? Or, if you plan to retire in 30 years, what’s your comfort level with owning stocks? How about when you are already retired?
Every mutual fund company has its own way of diversifying assets in these target retirement funds, and you might be surprised when you look at these numbers.
For people a few years away from retirement: anywhere from 30% to as much as 80% of your money could be invested in stocks in a target retirement fund designated as appropriate for you.
If you are young and expect to work another 20 to 35 years, expect 80% to 90% of your assets to be invested in the stock market if you go with the appropriate target date. Example: You plan to retire in about 2040, hopefully a little sooner. You have a 401k plan that offers a Target Retirement 2040 Fund, so you go with it and invest everything there.
If you are retired and had your nest egg in the safest of these funds, called a retirement income fund, why did you lose money between September of 2008 and March of 2009? Take a closer look at your fund’s annual report. You likely had more money invested in stocks than you thought, and the stock market was down about 40% during that time period of just a few months.
In late 2007, some folks getting ready to retire in just 2 or 3 years had their retirement savings in a target retirement 2010 fund, thinking it would be safe. A year and a half later they had lost 30% of their retirement assets.
The mutual fund companies and the investment business in general see things differently than many of their customers do. I spent over 20 years working as a stock broker and financial planner, working directly with the investing public. If clients wanted a high degree of safety, that’s what I gave them. If they were willing to accept a moderate risk, I recommended the appropriate stocks and bonds.
What you need to know about target retirement funds and the investment business in general is that the folks in charge there don’t necessarily think like you and I. I include myself here, because I was routinely scrutinized for disagreeing with management (my sales managers, and their superiors).
In management’s view, most people invest too conservatively; and it’s their job (and mine) as professionals to show folks how to invest to be more aggressive. In other words, they believe that clients (people) should be forced-fed stocks and stock funds whether they like it or not, because it’s for their own good.
Between 1982 and 2000, this way of thinking worked in favor of the clients (investors), because the stock market cooperated and went up the majority of the time. Then, in 2000-2002 the stock market took a beating; and it happened again in 2007-2009.
These are tough times to be an investor if you don’t know how to invest. If you are to succeed financially, you’re going to need knowledge of investments and investing. Target retirement funds are the easy way to go, but look before you leap because most of them involve more risk than first meets the eye.
Once you’ve learned how to invest you might still want to own some of these funds, but you won’t want to bet your entire retirement savings on them. You can tailor your own investment plan, one that suits YOUR comfort level, once you are informed and know how to invest.
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.
Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com
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