Target Retirement Funds

[pochax]

Saw this article from cnnmoney:
http://money.cnn.com/2009/04/27/news...ion=2009042713

The interesting thing about this to me is that these products seemed to be a good fit for the vast majority of people who 1) don't have a lot of financial education about investing, 2) are not comfortable doing their own investing/rebalancing/allocating, and/or 3) are not INTERESTED in changing #1 and #2 (because they have better things to do with their time). However, the article goes on to suggest that these Target Retirement (TR) Funds (Usually a fund of funds that make up a typical asset allocation that SHOULD be appropriate for one's projected retirement date) have been allocated too aggressively and people who entrusted their retirement savings into them got hit hard by the recession/stock market crash. Certainly, those of us who are younger and have a long (10+ years) time horizon until retirement have time to recover, but those nearing retirement cannot take the same consolation.

Does anyone here invest in a TR fund and, if so, have you considered moving the target date to a more conservative date (eg. if you are planning to retire in 2025, you invest in a 2020 fund) in order to compensate for the aggressive nature of these funds? Do you know what your asset allocation (stock/bond/cash %) within that fund?

[bob]

I don't have any, and while they may not be a bad idea for people who want to spend no energy/thought on investing for retirement, I just can't say that I am excited about them... Essentially it is a way to try to mechanize or automate the whole retirement savings thing - and as you mention it is still a flawed system

[matt]

http://www.getrichslowly.org/blog/2009/ ... tual-fund/ here's a great article on how these target retirement fund (fund of funds) managers have an inherent conflict of interest.

You're better off making informed decisions on your retirement investments, IMO.

[pochax]

nice article matt...from my own personal experience, i didn't have a clue how to invest (asset allocation, risk tolerance, expense ratios, etc.) when i started educating myself. unfortunately, that uneducation had my entire 401k in a money-market (safe - yes, but no room to grow). i think a target retirement fund would have been a better option. as i educated myself i realize i didn't need the hand-holding that the TR fund gives. When i do look at the asset allocation of the big 3 (Vanguard, Fidelity, TR Price) TR funds, i'm actually impressed that they do get it 90-95% right, IMO. But i do agree that one could do it yourself and rebalance regularly and boost their returns a little bit over the long haul.

[Clarinda Della]

We have gotten some information on them and how much to start. We are thinking of just saving money in a cd first and when it builds up enough money go to a mutal funds. Is that a good plan? What should I look for in a Retirement Plan? What company do you feel has a better Retirement Plan?

[pochax]

We have gotten some information on them and how much to start. We are thinking of just saving money in a cd first and when it builds up enough money go to a mutal funds. Is that a good plan? What should I look for in a Retirement Plan? What company do you feel has a better Retirement Plan?

What is "enough to go to a mutual fund"? The problem with this approach is that you could be mixing money that NEEDS to be safe with money that can be put at risk (investment-wise). If your CD money represents your emergency fund or a savings goal that is near term (<5 years), just keep it in a CD, savings account, ot money market account. If you have enough "safe money", then there is no downside to putting the money into mutual funds now so long as you make the minimum investments. I noticed that Vanguard requires $3000 minimum for their taxable accounts (maybe lower in an IRA?) and T Rowe Price (TRP) requires typically $1000-2500 minimum (lower in an IRA) and even allows $50-100 if you start automated contributions. ING's Sharebuilder also has some funds with $1000 minimums. Although I don't work for any of these companies and i encourage you to look around and shop on your own, my personal recommendation would be for Vanguard since they are among the lowest cost mutual fund companies out there and have an established history and reputation. All target retirement funds are based on the year around which you plan to retire and Vanguard's relatively conservative asset allocation (compared to some others like TRP and Oppenheimer) may help ease the pain during a bad downturn (although nothing helped during last year's downturn). Like all investments, there are no guarantees and the money should not be at risk at all if you do not have your emergency fund built up to where it needs to be.

[clydewolf]

Pochax has given you sound advice.

I would suggest you begin by understanding many different aspects of finances.
I like and regularly refer to Austin Pryor's book, "The Sound Mind Investing Handbook". This book is divided into 6 sections:
- Getting Debt Free
- Saving for Future Needs
- Investing Your Surplus
- Diversifying for Safety
- Retirement Countdown
- Investing that Glorifies God

The book is about 350 pages and discusses Insurance, IRAs, 401k plans, Saving for College, Income Taxes, Rebalancing your Portfolio, Bonds and Bond Funds, Cd's, Stratages for Safety and for Long Term Growth, Managing your Risk, and many more items and areas of finance.
The book can be purchased at Amazon for about $25.
http://www.amazon.com/s/ref=nb_ss?ur...ryor&x=12&y=14

[4jacks]

Pochax has given you sound advice.

Word!

The book can be purchased at Amazon for about $25.
http://www.amazon.com/s/ref=nb_ss?ur...ryor&x=12&y=14

[/quote]

Or on ebay for $7 shipped!
http://cgi.ebay.com/The-Sound-Mind-I...3286.m20.l1116

[clydewolf]

4jacks,

Good point, but the SMI Handbook was updated about one year ago.
The one on e-bay is the previous edition.....
It would still be a good read.

[4jacks]

4jacks,

Good point, but the SMI Handbook was updated about one year ago.
The one on e-bay is the previous edition.....
It would still be a good read.

Sorry didn't notice. Looks like thier is a 1996, 2004, and 2008 version... does this guy think he's writing a text book or something.

Here's a link the the new one $13.50 shipped.
http://cgi.ebay.com/Sound-Mind-Inves...d=p3286.c0.m14

[Elmira Nancy]

Target Retirement mutual funds set a specific retirement year and invest according. Ones with a later retirement date are more aggressive and therefore riskier. Ones with an earlier retirement date are more conservative in order to preserve capital rather than have it appreciate a whole lot.

[dklange]

I have one of the target date funds and it lost just as much as my other (non-target date) funds when the market crashed. Make sure you do your research when picking any fund that you invest in. I've only had mine for about 2 years and I have about 30 years before retirement, so I'll have to see how it all works out down the road.

[Darren]

I agree with pochax in that I also thought the target retirement funds were created for people who fit the description outlined in the 3 points above. The funds with a 2010 target date were invested way too aggressively and inappropriately for their projected retirement date.

“According to Israelsen, the average 2010 fund - marketed to investors who were aiming to retire next year - was more than 45% invested in stocks in December.”

For someone heading into retirement, I think that a 45% allocation in stocks is way too aggressive. A number closer to the 25-35% range seems more appropriate.

“The lesson here is that even with investments that are meant to put you on autopilot, you have to be alert.”

This is why I believe we should all learn about asset allocation and rebalancing portfolios ourselves. It’s not too difficult to grasp, and would save you from the pain that a lot of target fund investors went through.

I currently invest heavily in the Vanguard 2050 fund, which allocates 90% in stocks and the rest in bonds. However, I have about 40 years until I reach retirement age, so I’m not extremely worried about my portfolio losing value.

Rather than moving the target date to a more conservative date, I’m planning on doing my own allocation and rebalancing with several index funds once I have more money invested. I'll probably follow one of the lazy portfolio strategies shown here.

http://www.marketwatch.com/lazyportfolio

I've found them to be informative, and I hope it helps.

On a side note, is there a way to create a link to another site? I looked in the FAQ section, but was not able to find anything. Thanks.

[pochax]

This is why I believe we should all learn about asset allocation and rebalancing portfolios ourselves. It’s not too difficult to grasp, and would save you from the pain that a lot of target fund investors went through.

I currently invest heavily in the Vanguard 2050 fund, which allocates 90% in stocks and the rest in bonds. However, I have about 40 years until I reach retirement age, so I’m not extremely worried about my portfolio losing value.

Rather than moving the target date to a more conservative date, I’m planning on doing my own allocation and rebalancing with several index funds once I have more money invested. I'll probably follow one of the lazy portfolio strategies shown here.

dwu, i would agree with your approach. based on others' experiences, it sounds like ~$50,000 value in your retirement account is a good threshold at which to convert from a target retirement fund into a lazy portfolio (all of which i completely agree with).

On a side note, is there a way to create a link to another site? I looked in the FAQ section, but was not able to find anything. Thanks.

perhaps one of the moderators can answer for you, but i suspect you cannot create links except in your signature, mostly to avoid spammers (of which we get a lot of here).