retirement

Aim my retirement money into target funds?

Don TaylorDear Dr. Don,
Is a target retirement fund wise for a new retirement investor? With all the economic instability reports that keep coming up in the news, is it wise for me to start investing for my future retirement in a target fund? I expect to retire around 2060, and the fund has me investing my retirement money in approximately 63 percent general stocks, 27 percent international stocks and 10 percent bonds.

I could really use some help! My retirement is a long way out, but I am not sure investing 90 percent in stocks right now would be the appropriate way to go.

Thank you,
-- Dave Denouement

Dear Dave,
There really is no such thing as a "one decision" portfolio, but that's the concept behind target-date retirement funds. You don't need to change funds; the fund manager will change asset allocations to meet your expected attitude toward risk and return as you age, based upon a targeted retirement date.

Target funds have become the default choice for many 401(k) plan providers, meaning that if you don't pick how your retirement money is to be invested, the plan picks for you, and it picks a target-date fund based on your expected retirement age.

The idea behind the funds is to manage the asset allocation of your tax-advantaged retirement portfolio over your career by rebalancing the asset allocation. People with many years until retirement age will have a more aggressive asset allocation than people in the later stages of their careers. You can review how the asset allocations change over time.

The general asset classes are stocks, bonds and cash. But the allocations are typically more specific than that, delineating between: international and domestic investments; emerging-versus-developed markets; small, medium, and large companies; and, possibly, alternate asset classes such as real estate and commodities.

One of the issues I have with target-date retirement funds is that they focus on reducing portfolio risk as you approach your retirement date. But I would argue that if you retire at age 67, you could still enjoy another 20-30 years of investment returns in your retirement accounts.

There are ways to get around this issue, including choosing a fund target date that is past your planned retirement date. When you do that, you're taking an approach that's based more upon lifestyle than on a retirement date. The lifestyle fund approach focuses more on the investor's attitude towards risk and capacity to take on risk, and not just on his or her planned retirement date.

Target-date retirement funds are a great first choice for young people who want to invest but don't know what to invest in. As the portfolio grows over time and the investor becomes more knowledgeable about investing or finds a trustworthy financial adviser, a move to a more customized portfolio often makes sense.

I can't tell you how to time the market and whether a 90 percent allocation to stocks currently makes sense. But if you're just starting out in your career, I can tell you that it's easy to be too conservative in your retirement investing. If you sit on the sidelines now, what's going to be your signal that it's time to jump in and increase your stock allocation? When the market peaks?

How much retirement money do you have at risk in this account? If you're just starting out, there's not much downside risk in your newly minted portfolio, so give the target fund a shot. It doesn't have to be forever.

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