Target Retirement Funds: How to Put Your Investment Portfolio on Autopilot
by Alexander Green, Chairman, Investment U
Investment Director, The Oxford Club
Monday, May 19, 2008: Issue #797
All of us have friends or relatives that are largely ignorant of investing fundamentals. Yet, like the rest of us, they have to do something intelligent to make sure their money is working for them. Stowing it in a money market account isn’t terribly clever. But managing a portfolio of individual stocks isn’t conceivable for most.
For folks who are too busy, too uninformed or too lazy to take an active management role - I generally recommend a target retirement fund. These target date portfolios offer automatic asset rebalancing as you age, with a specific date when the fund ends.
The idea is to have an aggressive portfolio when you’re young, a balanced portfolio in middle age and a conservative portfolio in retirement. That generally means the exposure to stocks slowly declines and the percentage in bonds gradually increases.
It’s clean. It’s easy. It’s simple. And it requires virtually no time or attention…
Target Retirement Funds Have Doubled Since 2005
The number of target retirement funds has doubled since 2005 to 289, since they require such little attention. Their combined assets are now $186 million.
Still, whenever you’re dealing with Wall Street, there are reasons for caution.
Let’s start with the first potential problem: performance. Virtually all of these funds are made up of stock and bond funds within the sponsoring family. Not all those funds have done so great. In fact, Forbes recently argued that “some operators stuff mediocre funds into their target portfolios, perhaps hoping that their performance histories will be less visible there.”
Good old Wall Street… For example, MassMutual’s Select Destination Retirement 2030 Fund has returned just 4.4% a year over the past three years. The T. Rowe Price Retirement 2030 Fund, by comparison, has at least returned 7.4%.
Neither return is breathtaking, but the MassMutual fund is really dragging an anchor. That’s partly because it has a 1.34% annual expense ratio vs. 0.73% for T. Rowe Price. Bear in mind, most target funds have a layer of fees on top of the fees each fund is levying inside the portfolio. Compound even an extra half a percentage point of higher annual costs - even with no additional contributions - and you will have 14% less at retirement.
The First Choice in Target Retirement Funds - Vanguard
If a target retirement fund is your vehicle and you want the best of the breed, your first choice should be Vanguard. Vanguard has a unique ownership structure. Its funds are actually owned by the fund shareholders themselves. That keeps costs at rock bottom.
Unfortunately, the Vanguard target funds were only launched in mid-2006. So they don’t really have established track records yet. But low costs alone are likely to keep them in the top quartile for performance. (Vanguard target funds have expenses 70% lower that T. Rowe Price, for example.)
Vanguard currently offers target retirement funds for:
- 2010
- 2020
- 2030
- And 2040
To learn more, visit Vanguard.com or call them toll free at 877.662.7447.
Are target retirement funds a stroke of genius? Hardly. But investors could do a lot worse. At the end, you get a lump sum payout - the target retirement fund’s ending net asset value - when the fund hits its maturity date.
And it beats watching your close friends or relatives do something blithering with their money.
Good investing,
Alex
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Today’s Investment U Crib Sheet
- Most Americans should look to replace between 65% to 85% of their pre-retirement income to maintain their living standards in retirement. Conventional thinking is that as a retired individual, you will be spending less and require less than what you did in your working years.
- But the rules of retirement are changing. With men and women living longer and healthier, retirement’s old definition doesn’t fit many retiree’s needs. Better health and more free time may require more money and not less. Those who are physically able will choose to work longer, and many will continue working for benefits like health insurance.Social Security is the wild card for many retirees - for some it will account for a majority of their retirement income, and for others only a part of the whole.
- The importance of knowing what you need and the steps to take is paramount. Today there are numerous tools to help you in retirement planning. The Social Security administration provides a statement to all Americans over age 25 annually. Barring any Social Security changes from the government - which is always possible - it can give you a good understanding of what to expect.It gives you detailed data and the monthly benefits they have qualified for like: The amount you would receive in retirement.Your annual income paid into social security. The amount you receive if you were to be disabled. Amounts for family and survivors.If you have qualified for Social Security and Medicare.
- You should be receiving a statement automatically, but if you need to request an additional statement you can go here: https://secure.ssa.gov/apps6z/isss/main.html
- For several other ways to play “extreme retirement catch-up,” take advantage of Personal ROI: Turn Your Savings Into a “Personal” Pension Plan Worth $100k a Year.
Related Articles:
- Your Retirement Plan: Have You Calculated Your Number?
- The Permanent Portfolio Fund: Harry Browne’s “Peace of Mind” Investment
- Variable Annuities: Safely Double Your Money… With Stock-Like Returns
