Tag Archives: retirement

Is a Target Date Retirement Fund for You?

tracking your money

All of my 401 K money is in a target date fund. I’ve haven’t talked about my this strategy for a couple of reasons. The choice illustrates my lack of sophistication when it comes to investing. Plus some writers have expressed negative opinions about this investment choice.

This type of fund may be the right choice for you so let’s talk about it together without embarrassment.

What is A Target Date Fund?

A target date fund may also be called a lifecycle or age-based fund. It is a mutual fund consisting of a mix of assets (stocks, bonds, etc.) that becomes more conservative over time based on the target date.

Typically the target date is included in the name. Investors selecting the Vanguard Target Retirement 2020 Fund most likely plan to retire during or close to the year 2020. The year may be adjusted based on tolerance for risk. I chose a fund later than I plan to retire because it was more aggressive.

Until target date funds were offered at my employer, I muddled my way through selecting funds and trying to keep them balanced based on my risk tolerance. I’m sure I lost a lot of potential earnings with this haphazard method.

Pros of a Target Date Fund

tracking your money

There are many reasons people like me choose this type of mutual fund. Target date funds are simple and that appeals to us. I don’t have to decide which funds from the list of options to pick let alone worry divid

Re-balancing is automatic and handled by the fund manager. No need to move funds around because the ratios are out of whack.ing my contribution among them.

Lastly, it’s hands off once you get started. Just pick the desired target fund and you don’t have to think about it. I don’t worry because an individual fund might be doing bad this week resulting in no stress.

Cons of a Target Date Fund

I alluded to one of the problem with lifecycle funds. They don’t take the risk tolerance of individual investors into account. The assumption is that all people planning to retire in 2030 (or whatever date) want the same allocations. The way around this problem is to select the fund with the desired balance instead of by date.

Another concern is the one size fits all approach. Everyone in the fund has the same stocks, bonds, etc. If you want an unique portfolio, this isn’t the right option for you.

Be selective in choosing the fund because some consist of funds from a single company (for example all Fidelity or all Vanguard). Diversification is important to ensure all your eggs aren’t in one basket.

When comparing my annual returns to some of my friends, I’m comfortable with my decision to invest in a target date fund. I usually beat or come close to their returns with a lot less stress. Maybe it’s also the choice for you. What’s your retirement fund investment strategy?

Make Retirement Easier – Automate Contributions

retirement invest

Planning and investing for your retirement doesn’t have complicated or difficult. While you should definitely have some overall plan with your money, getting paralyzed by all the options and choices you have can make unproductive and leave you financially vulnerable.

Start Contributing to Your 401(k) retirement invest

When you’re just starting to look around for which account to invest in, start with your job. My husband’s job offers a 401(k) with a match and we try to take advantage of it. Try to at least set aside enough money to receive the company match as it’s basically free money in your pocket.

Depending on your employer, you’ll have different funds to invest in. If available consider putting your contributions towards low cost index funds. My husband doesn’t have this option, but he has found funds that have lower expenses and track different sectors to diversify his portfolio.

My advice is to increase the amount as you receive raises and promotions through work. It doesn’t have to be significant, just take it up a notch every increase. Besides allowing you to invest more, you’re also lowering your taxable income, a double bonus.

By the way, if your company an Employee Stock Purchase Program, you may want to consider participating.  ESSP allows you to have some of your paycheck deducted to buy your company’s shares at a discount from its market price. Just remember to be diversified with your retirement fund and not too heavily invested in your company.

Open Up an IRA and Take Advantage of the Benefits

Once you’ve set yourself up to get teh full company match, you may want to look at contributing to your IRA (traditional or Roth). The main difference between the two IRAs has to do with when you’ll be taxed:

  • Roth IRA – contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free.
  • Traditional IRA – contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made with pre-tax assets”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income.

Banks, brokerages, and credit unions offer IRAs. Some charge a flat fee for the year, some take a fee for each transaction made, others can take a percentage, and some do all of this. Compare your options to see if you’re getting a good deal.

Thoughts on Automating Retirement Contributions

For those who are investing automatically, what percentage of your income to do set aside every month? Where do you do invest (employer’s 401(k), brokerage, local bank) your money?

Note: This post was included in the Carnival of Personal Finance