Are target date funds right for you?
August 10, 2011
Let's face it: Most of us aren't that confident when it comes to investing our hard-earned savings accounts in the stock market. According to the Chicago Tribune, only 4 percent of women and 9 percent of men are completely self-assured when it comes to making investments. We know how to find the best CD rates or good refinance rates, but the stock market is another matter.
A good example came when the financial crisis hit. One in four of all baby boomers had 90 percent of their 401(k) savings accounts invested in stocks--way too high a number considering these folks were on the verge of retirement. As a result, many of us got hammered during the 57 percent loss in the stock market and we're resigned to working later in life to rebuild our checking account, savings accounts and retirement investments. Some have sworn off the stock market completely in favor of safe money market accounts.
More conservative types had a better mix of stocks and bonds--say 60 percent stocks and 40 percent bonds--and weathered the storm just fine. And now, possibly as a result of that market slide, an increasing number of 401(k) retirement savings accounts are offering what are called target date funds, which remove a lot of the guesswork over how much risk you should carry in your portfolio as you approach retirement.
Target date funds, also known as life cycle funds, carry a number on them, such as 2030. That number represents the year you want to retire. If you plan to retire in 2020, for instance, pick a 2020 target date fund. These funds then automatically decrease your stock holdings while increasing your bond position as you approach retirement.
Those steady risk adjustments, which USA Today calls a "glide path," vary from company to company. A fund from T. Rowe Price, for instance, might keep you in stocks for 30 years after retirement while a fund from Vanguard has you divested of riskier stock investments within seven years.
Target date funds may be worth examining if you're uncertain about your own investing prowess. In addition to researching a fund's glide path, look at how much the company charges in fees, and, according to USA Today, don't put all your retirement funds into any one retirement account.