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Flying Autopilot With Target-Date Funds: Points To Consider
FYI: What's in your 401(k)? For more of us, the answer is just a single fund. Target-date retirement funds aim to make investing simple, and that's why their popularity is exploding. Just pick one pegged to the year you plan to retire, put money in steadily, and it will take care of loading up on high-growth, riskier stocks when you're young and moving into more conservative investments as you age. Regards, Ted http://bigstory.ap.org/article/7a02eac1ec15481ab7abc85153e8ca65/flying-autopilot-target-date-funds-points-consider
I think these funds are the best option for a majority of 401k working investors. I would like to see them standardized across brokerages though. Maybe if they called them by their target stock/bond allocation instead of retirement date. The Vanguard's, Fidelity's and T.Rowe Price's of the world can then add "recommended for retirement date such and such". Seems like a much better way to understand what you're invested in.
I believe Target (allocation) funds can be used quite effectively to not only get you to "work retirement", but also as a tool to get you through until your "earthly retirement" aka death. Something I have shared before and I am still refining are these investment thoughts:
bee's Target Date Strategy:
I've often thought there are really two target dates, one targeting retirement from "work" and one targeting retirement from "earth".
Fully funding a retirement dated (glide path allocation) fund makes perfect sense. As a retirement dated fund glides towards its maturity date it attempts to provide a smooth landing for your investment at that date.
Effectively, at "work" retirement, an investor would have most of their assets in low risk investments. This might be helpful if the markets happens to severely correct in the first 5 years of retirement, but this portfolio must also be re-allocated the prepare for longevity risk (your money needs to last as long as you do). So, during the first few years of retirement a portion of this retirement portfolio needs to reallocated into investments that attempt to achieve portfolio longevity in retirement.
In a sense, a retiree could reallocate a percentage of their retirement portfolio into target date funds that target the incremental need to reach "earthly" retirement. Much like laddering CDs, a retiree could ladder target date funds in 5 year increments that will be used for spending if the retiree is lucky enough to reach that target date.
I could envision a retiree owning 6 separate retirement dated funds, each maturing 5 years further into the future (funding years 65-95 or 70-100) and each needing differing amounts of initial funding based on financial needs during that 5 year period in the future. The last fund matures on your date of death and pays your funeral expenses.
Sorry if some of this sounds a bit morbid to the reader.
Comments
bee's Target Date Strategy:
I've often thought there are really two target dates, one targeting retirement from "work" and one targeting retirement from "earth".
Fully funding a retirement dated (glide path allocation) fund makes perfect sense. As a retirement dated fund glides towards its maturity date it attempts to provide a smooth landing for your investment at that date.
Effectively, at "work" retirement, an investor would have most of their assets in low risk investments. This might be helpful if the markets happens to severely correct in the first 5 years of retirement, but this portfolio must also be re-allocated the prepare for longevity risk (your money needs to last as long as you do). So, during the first few years of retirement a portion of this retirement portfolio needs to reallocated into investments that attempt to achieve portfolio longevity in retirement.
In a sense, a retiree could reallocate a percentage of their retirement portfolio into target date funds that target the incremental need to reach "earthly" retirement. Much like laddering CDs, a retiree could ladder target date funds in 5 year increments that will be used for spending if the retiree is lucky enough to reach that target date.
I could envision a retiree owning 6 separate retirement dated funds, each maturing 5 years further into the future (funding years 65-95 or 70-100) and each needing differing amounts of initial funding based on financial needs during that 5 year period in the future. The last fund matures on your date of death and pays your funeral expenses.
Sorry if some of this sounds a bit morbid to the reader.