The benefits of low-cost index mutual funds and ETFs are all over the news.  They were front and center in the recent PBS Frontline Special The Retirement Gamble.  Index funds are a great tool for investors of all ages; in many cases these passively managed funds beat the majority of their actively managed peers within the same investment style.  However, investing in index funds takes work, especially with the proliferation of new index products that continue to hit the marketplace.

Expenses matter 

Costs matter when investing.  One of the biggest lures of index fund investing is that many of these products provide a low cost way to investment in a given segment of the market.  If you are looking for an index fund that mimics the S&P 500 there are many great low cost alternatives such as the Vanguard 500 Index Fund (Ticker VFINX) with an expense ratio of 0.17% or the SPDR S&P 500 Index ETF (Ticker SPY) with an expense ratio of 0.09%.  On the other hand, there is also the Rydex S&P 500 A (Ticker RYSOX) with its expense ratio of 1.51%.  How big of a deal is this difference?

A $10,000 investment in the Vanguard 500 fund made on May 31, 2006 and held until May 15, 2013 would now be worth $15,064.  That same investment in the Rydex S&P 500 fund would be worth $13,798 or 9.2% less for an investment in a mutual fund tracking the same index as the Vanguard fund. 

Understand the underlying index 

In the wake of the 2008-2009 market downturn new index products, especially in the ETF space, have proliferated.  ETF providers are falling all over themselves to bring new index products to the market hoping to attract assets.  Like any investment, investing in an index fund or ETF requires that you understand what it is that you are buying.

When I think of indexing I think of the traditional, basic index products that track benchmarks such as the S&P 500, the total U.S. stock market, the total non-U.S. market, the domestic bond market, etc.  Additionally I typically use index funds to benchmark the U.S. small and mid cap equity spaces, real estate, and emerging markets equity among others.

Several months ago Market Watch’s Chuck Jaffe cited a Vanguard report that found “1,400 U.S. listed ETFs track more than 1,000 different indexes. But more than half of these benchmarks had existed for less than six months before an ETF came along to track it.”  

As an investor this should be a huge red flag.  What this study says is that many of these new index products were developed much like the monster in the Mel Brook’s classic Young Frankenstein.  Look back-testing is not inherently bad and many of these new index products are appropriate for professional traders.  However if you are looking to index in the fashion that Vanguard founder John Bogle and others espouse then you should consider sticking with index products that track known, battle-tested market benchmarks.

Asset allocation is still vital 

Whether you use index products as a portion of your overall portfolio in conjunction with other investment vehicles such as actively managed mutual funds or individual stocks, or if you invest in index funds exclusively you still need to develop and asset allocation for your portfolio.  As I say frequently on this blog, this should be done as an outgrowth of your financial plan.

Even a seemingly simple strategy of investing in a total U.S. stock market fund, a total international stock market fund, and a total bond market fund still requires that you determine how much to invest in each fund, that you monitor your allocation and rebalance when needed, and that you review and adjust your target allocation as you age or if your situation changes.

Index funds and ETFs are a great investment tool.  Like any tool it is important that you select the right index product and that you manage your portfolio properly.

Please feel free to contact me with your investing and financial planning questions.  Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.  

For you do-it-yourselfers, check out Morningstar.com to analyze your index mutual fund and ETF options and to get a free trial for their premium services.  Please check out our Resources page for links to some additional tools and services that might be beneficial to you.  

Photo credit:  Wikipedia

According to the folks at PBS Frontline, retirement is a gamble at best.  One way to increase your odds of success is to use conservative assumptions.  As a financial advisor I generally use conservative assumptions in all aspects of client financial planning.

If you’re concerned about running out of money during retirement, you need to be realistic and conservative with your assumptions. Here are 8 conservative assumptions for you to consider:

Assume you will need 100 percent of your current income in retirement  

Many rules of thumb suggest you’ll need between 70 and 100 percent of your pre-retirement income in retirement, but plan on at least 100 percent to be safe. Today’s retirees are active, they want to travel, pursue hobbies, and live a generally active lifestyle.  This costs money.  Even though you will likely slow down a bit as you age, medical costs later in retirement will likely rise and may replace what you were spending on activities and travel earlier in retirement.

Add extra years to your life expectancy  

We are all living longer with advances in medicine and the like.  Many factors come into play here including the history of longevity in your family.

Reduce your estimates of Social Security benefits  

The youngest of the Baby Boomers can likely count on Social Security as we know it but I’m guessing that those younger than 50 may see reduced benefits.  In the interest of being conservative, I suggest that you take your current estimate from Social Security and reduce it by say 25%.  If things work out better that’s great, if not then you’ve planned and saved accordingly.

Cut back on your living expenses now  

This not only frees up money to set aside for your retirement, but it helps you adjust to a potentially lower standard of living in retirement.

Be conservative with your investment expectations

We are four plus years into a stock rally and the stock market is at record levels.  For investors nearing retirement it is a good idea to adjust your portfolio and expectations regarding investment returns accordingly. 

Rethink early retirement  

Saving enough to last from age 65 to age 85 or 90 is a difficult task. Trying to retire at age 55 or 60 is just not practical for most individuals, unless you’re willing to significantly change your lifestyle. Working a few more years can go a long way in helping fund your retirement. Those years are typically your highest earning years, so hopefully you’ll be able to save significant sums during that period. Also, every year you work is one year you don’t have to support yourself with your retirement savings.

Consider working during retirement 

Especially during the early years of retirement, you should consider having at least a part-time job. Even modest earnings can help significantly with current retirement expenses help delay the need to withdraw money from your retirement accounts at least to some extent.  Additionally this can be a great way to transition to “full retirement” especially for those retiring early.

Take conservative withdrawals from your retirement accounts  

Don’t plan on taking out more than 3 to 4 percent of your balance annually.  The “four percent rule” is a handy rule of thumb, but it is just that.  Everyone’s situation is different.  It is best to start with a detailed retirement expense budget and then determine what your investments and other sources of income can support.

The best retirement planning strategy is to have a financial plan in place. Monitor your retirement accumulation progress against the plan’s benchmark and make adjustments as needed in areas such as the amount you are saving, your investment allocation, and the lifestyle that your resources will support.  Always be conservative in your planning, it’s much better to have more than you planned on than to hit age 80 and realize that you are out of money.

Please feel free to contact me with your financial and retirement planning questions.  Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.  

Please check out our Resources page for links to some additional tools and services that might be beneficial to you.

Photo credit:  Wikipedia

Sunday is Mother’s Day and I know my wife is glad to have our two local kids home this weekend.  On Sunday we will be heading to Rosebud on Rush in the city for lunch, a favorite spot, for the second year in a row.

This will be my last weekly links post, but you will continue to find my latest posts about  topics regarding financial planning, investments, and retirement plans here at  The Chicago Financial Planner.   I will likely continue to do a links post of some sort from time to time.

I thank everyone for your continued readership.  If there is a topic  that you would like me to write about or a question that you would like answered please send me a note via the contact page.

Here are a few links to some great weekend financial reading. 

Personal Finance Blogs

Ryan shares How to Verify a Military or Veteran Charity is Real at Military Wallet.

Jason asks Are We Taking the Wrong Retirement Risks? at Hull Financial Planning.

Robert shares The Single Most Important Trait That Defines Personal Finance Success at The College Investor.

Mike answers Does a Bond Fund’s Yield Tell You Its Level of Risk? at Oblivious Investor.

Posts from Fellow NAPFA Members

Robert Schmansky says The Retirement Crisis Debate Needs New Experts at forbes.com.

Jim Blankenship discusses Fixing an IRA With the “Wrong” Beneficiary at Getting Your Financial Ducks in a Row.

Other financial articles from around the web 

Mark Miller offers More Tips on Long-Term Care Insurance at morningstar.com.

Robert Powell tells us What retirees really want: Peace of mind at marketwatch.com.

In case you missed it here is my latest contribution to the US News Smarter Investor Blog Not All Index Funds are Created Equal.

Here’s wishing everyone a great weekend.   Happy Mother’s Day to all the Moms out there.

Photo credit:  Wikipedia

Over the past 13 years we’ve seen two market peaks followed by pronounced market drops.   The S&P 500 peaked at 1,527 on May 24, 2000 and then dropped 49% until it bottomed out at 777 on October 9, 2002.  The Dot Com Bubble and the tragedy of September 11 all contributed.  The S&P 500 rose to a high of 1,565 on October 9, 2007 only to fall 57% to a low of 677 on March 9, 2009 in the wake of the Financial Crisis.  Since then the market has rallied with the S&P closing at a record 1632 on May 9, 2013.  As someone saving for retirement what should you do at this point?

Review and rebalance 

During the last market decline there were many stories about how our 401(k) accounts had become “201(k)s.”  The recent PBS Frontline special The Retirement Gamble put much of the blame on Wall Street and they are right to an extent, especially as it pertains to the overall market drop.

However, some of the folks who experienced these drops well in excess of the markets were victims of their own over allocation to stocks.  This might have been their doing or the result of poor financial advice.

Regardless we are in the midst of a four year rally off of the 2009 lows and the past year’s gains have been especially torrid .  This is the time to review your portfolio allocation and rebalance if needed.  For example your plan might call for a 60% allocation to stocks but with the gains that stocks have experienced you might now be at 70% or more.  This is great as long as the market continues to rise, but you at increased risk should the market head down.  It may be time to consider paring equities back and to implement a strategy for doing this.

Financial Planning is vital

If you don’t have a financial plan in place or if the last one you’ve done is old and outdated this is a great time to have one done.  Do it yourself if you’re comfortable or hire a fee-only financial advisor to help you.

If you have a financial plan this is a great time to review it and see where you are relative to your goals.  Has the market rally accelerated the amount you’ve accumulated for retirement relative to where you had thought you’d be at this point?  If so maybe this is a good time to revisit your asset allocation and perhaps reduce your overall risk.

Learn from the past 

John Hancock has been running a commercial that shows nicely dressed middle-aged couples in their financial advisor’s office saying that maybe this is the time to get back into the market.  As an advisor these commercials are nauseating to me.

It is said that fear and greed are the two main drivers of the stock market.  The talking suits on shows like CNBC seem to feel that the market has a ways to run and might even be undervalued.  Maybe they’re right.  However don’t get carried away and let greed guide your decisions.

Manage your portfolio with an eye towards downside risk.  This doesn’t mean the markets won’t keep going up or that you should sell everything and go to cash.  What is does mean is that you need to use your good common sense and keep your portfolio allocated in a fashion that is consistent with your long-term goals and risk tolerance.

Please feel free to contact me with your financial planning and investing questions.  Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.  

For you do-it-yourselfers, check out Morningstar.com to analyze your investment holdings and your portfolio. Please click on the link to get a free trial for their premium services.  Please check out our Resources page for links to some additional tools and services that might be beneficial to you. 

Photo credit:  Phillip Taylor PT

The PBS Frontline documentary The Retirement Gamble has sparked a lot of discussion, both pro and con.  One thing that is clear, the show contributed to the discussion about the lack of retirement readiness among many in the United States.  I’m hardly an expert in behavioral finance, but I do know that in order for investors to be able to focus on planning for their retirement they need to adopt  the right mindset.

Lose the victim mentality

I saw a lot of this on the PBS special and see this written about frequently in the press.  The last few years especially have been rough on many of us saving for retirement.  Job losses; the financial crises; the Flash Crash; the realization that not all financial advisors have their client’s best interests at heart; the mutual fund scandals of the middle part of the last decade might all be good excuses to feel like a victim.

As my wife used to say to our kids on the soccer field (when they had a minor injury) “…suck it up and get back in the game…”  If you feel like a victim you likely will end up as one.  Right or wrong saving for retirement is on you, deal with it.

Drink your own flavor of Kool Aid 

I love index funds and ETFs and use them extensively throughout my practice.  They comprise the majority of the assets for which I provide advice.  I don’t, however, use passive index products exclusively.  There are solid actively managed funds that in my opinion warrant inclusion in some client portfolios.

There are some folks out there who have an almost cult-like devotion to indexing and John Bogle.  Mr. Bogle deserves all of the respect and admiration that he gets and then some.  My point is that no single way of doing things is always right in all cases.  It’s OK to mix and match funds, ETFs, active, and passive strategies, as well as other vehicles as long as they fit your financial plan and your needs.  Don’t let anyone put you down because you disagree with their way of doing things.

Focus on the future, don’t dwell on the past 

The past is in the books.  Maybe you didn’t save enough perhaps you invested in all of the wrong places.  Perhaps you had a greedy “financial guy” whose focus was on selling you products that enriched their bottom line at your expense.  Don’t forget your past mistakes, learn from them, but don’t dwell on them.

All you can do in the financial planning and investing world is move forward from wherever you are now.

• Find a fee-only financial advisor who puts your interests first.
• Get a financial plan in place with appropriate goals and strategies.
• Review your investing strategy.
• Beef up your retirement savings.
• Manage your career.
• Take charge

Our retirement savings system puts the responsibility for accumulating enough for retirement on us.  Get in the game make sure you have the right mindset and attitude to be successful.

Please feel free to contact me with your financial planning and investing questions.  Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.  

For you do-it-yourselfers, check out Morningstar.com to analyze your investment holdings and your portfolio. Please click on the link to get a free trial for their premium services.  Please check out our Resources page for links to some additional tools and services that might be beneficial to you. 

Photo credit:  Flickr

Today the Dow Jones Industrial Average crossed the 15,000 mark for the first time.  Who knows where it will end the day.  What does this mean to you?  It shouldn’t mean anything if you invest according to a coherent plan, other than perhaps that you may need to review and if needed rebalance your portfolio.

Here are a few links to some great weekend financial reading. 

Personal Finance Blogs

Emily compares the Pros and Cons of the 15 vs 30 Year Mortgage at PT Money.

Ken discusses Mutual Fund Expense Ratio: How Much Does It Hurt Investment Performance? at AAAMP Blog.

Kyle asks If Everybody Indexed, Would It Stop Working? at Amateur Asset Allocator.

Posts from Fellow NAPFA Members 

Fern Alix LaRocca warns us to avoid Refi Hell – I Almost Got Taken! at Figuide.com.

Lon Jeffries asks When Did You Last Review Your Insurance Coverage? at Figuide.com.   

Andrea Coombes discusses The risks and costs of exotic investments at marketwatch.com.

Dan Solin says CNBC’s Ratings Decline is Bullish News for Investors at usnews.com.

In case you missed it here is my latest contribution to the US News Smarter Investor Blog Improving Your Odds in the ‘Retirement Gamble’.

Here’s wishing everyone a great weekend.  

Photo credit:  Wikipedia

On a recent drive on the Tollway through the far South end of Chicago near the Indiana state line all of a sudden there it was the solution to all of the financial planning issues that I help clients deal with.  There was my financial epiphany, a road sign urging drivers to “Call the Safe Money Guy.”

Call me cynical, but I generally want to check to make sure my wallet is still in my pocket when I see a sales gimmick on the order of “The Safe Money Guy” advertised.

Sadly I was moving too fast to get the name of the firm so I am forced to dig into my vivid imagination to offer my thoughts on this and similar financial services marketing approaches.

Using 2008-2009 market drop as a sales tool 

I think the whole idea of using fear-mongering as an annuity sales tactic is reprehensible, which is what I’m guessing this guy is doing.  The pitch often goes something like this:

Fed up with the volatility in the stock market?  Tired of the guys on Wall Street making all of the money?  Invest for peace of mind and protect your principal.  Call us. 

So what’s wrong with this?  Far too often the annuity or insurance product being sold carries high ongoing expenses, onerous surrender fees, and returns that often don’t look all that great when you “peel back the onion” and take a hard look at the underlying product.  This pitch is common for Equity Index Annuities, a product that prompted even FINRA to post a warning page on its site.

Leading with a product vs. a plan 

My real beef with this approach and similar ones is that they lead with the sale of financial products instead of a financial plan.   How can anyone recommend any financial product to a client without first understanding in great detail the client’s goals, risk tolerance, and their overall financial situation?

Safe from what? 

Many investors would equate safety with having little or no chance of losing money on their investments.  That’s certainly one definition.  Let me offer a few other “safety” features you might find in some of the products sold in this fashion:

• Safety from low cost investment vehicles.
• Safety from the returns that might be needed to achieve your longer-term financial goals.  Over the years I have stressed the point to those planning for their retirement that the biggest single risk they face is from the ravages of inflation eroding the purchasing power of their hest-egg.  I’m not advocating that folks take more investment risk than is appropriate for them, I am advocating that they balance the need for growth to stay ahead of inflation against the bunker mentality being sold by some fear-monger financial sales types.
• Safety from product transparency.  Anyone who has ever read an annuity or insurance contract can attest to this.
• Safety from advisor compensation that is clearly defined and based only on financial advice provided.

Look I’m not against either life insurance or annuities.  They can both have a place in a well-constructed financial plan.   There are many folks who sell annuity and insurance products who are diligent and who do a great job for their clients.  Sadly there are others who use what I consider to be some questionable sales tactics.

The recent PBS Frontline documentary The Retirement Gamble served to highlight the high fees that are rampant in some retirement plans.  The same diligence needs to be applied by retirement savers and all investors outside of their company retirement plans.

If working with a financial advisor is right for you, choose a financial advisor who puts your interests first, who understands your needs, and who can recommend financial strategies and products to implement those strategies that are right for you, not those that put the most money in their pockets.

Please feel free to contact me with your retirement planning and investing questions.   Check out our Financial Planning and Investment Advice for Individuals page for more information about our services.    

Photo credit:  Wikipedia

The PBS show Frontline recently aired an investigative documentary on the state of retirement savings and the problems with 401(k) and similar retirement plans.  The show did a great job of highlighting a number of issues and was pretty scathing in its treatment of the financial services industry and workplace retirement savings plans.

As a professional who serves as a financial advisor to a number of 401(k) plan sponsors as well as to individual clients (most of whom are either close to retirement or in retirement) I watched this broadcast with great interest.  Here are my reactions to what I saw.

Key issues highlighted by The Retirement Gamble

• The high fees imbedded in some retirement plans, often these fees are next to impossible for the average participant to uncover.
• Poor investment choices offered in some plans.
• There are a lot of lousy 401(k) plans out there.
• The confusion and frustration that many retirement savers in 401(k) and other defined contribution plans feel due to the fact that they are responsible for accumulating enough for retirement.  This is in contrast to the era when many folks were covered by a defined benefit pension plan where the investment risks and responsibilities for funding the plan were on the employer’s shoulders.
• While the issues highlighted were not new to me nor to many of us in the industry, I think this documentary was a bit of an eye-opener to many in the general public.  I say this as there have been several surveys taken over the years where a shocking number of investors responded that they had no idea that there were fees charged by their 401(k) plan.

Where the documentary fell a bit short in my opinion 

As regular readers of this blog and those who follow me on Twitter and other social media outlets know, I am highly in favor of lower retirement plan fees and anything that increases transparency for investors.  That said I thought the show had a very decided bias against the financial services industry and almost felt as though they had come to their conclusions before they started on the project.

• The show did not highlight a single good 401(k) plan and there are many out there.
• The show did not highlight a single person who had used the 401(k) to accumulate a significant nest egg. I have the privilege to serve as advisor to a number of folks who have done just that.
• While I am an admirer of Vanguard founder John Bogle and use index funds extensively in the 401(k) plans that I advise and in the portfolios of all clients, I disagree that there are no actively managed funds worthy of investor’s dollars.  That’s not to say that these are the majority of active funds, but they do exist.  Finding them and determining if they are an appropriate investment choice for a plan sponsor to offer is what plan investment consultants are paid to do.
• While the program did mention advisors who act as Fiduciaries in passing, the focus was on those advisors, reps, and brokers who sell plans and/or suggest investment options that serve to line their pockets sometimes at the expense of the plan’s participants.  Why not interview some advisors who do the right thing for their plan sponsor clients and the participants of those plans?
• The worst part of the show is that while many problems and issues were brought to light, there was little in the way of advice or suggestions for plan participants on what to do to improve their situation.

I do have to say that the most amazing part of the show was the interview with the head of Prudential Retirement Christine Marcks.  She insisted that she was unaware of any of the research showing the advantages of low cost index investing over high cost active management.  While she may or may agree with the findings, the fact that she insisted that she was unaware of this research was jaw-dropping in my opinion.  I think Ms. Marcks should have been coached prior to her appearance by someone at Prudential.

The documentary is very worthwhile and if you haven’t seen it there is a link to the video on our Resources page.  Please weigh in below as to your thoughts on The Retirement Gamble.

Please feel free to contact me with your retirement planning and investing questions.   Check out our Financial Planning and Investment Advice for Individuals page for more information about our services.    

Retirement plan sponsors, do you need an independent review of your company’s plan?  Do you need help selecting a new plan provider?  Are you looking for ongoing financial advice to help you meet your fiduciary obligations and to provide a superior retirement savings vehicle for your employees?  Please feel free to contact me to learn about our investment consulting services for retirement plan sponsors.

Photo credit:  Flickr

Its NFL draft time again.  Let’s hope that UCLA’s Datone Jones, the first round pick of America’s team the Green Bay Packers pans out as well as some recent top picks such as Clay Mathews, Aaron Rodgers, and Randall Cobb.

Here are a few links to some great weekend financial reading. 

Personal Finance Blogs

Julie shares 3 Big Problems with Your Retirement Savings and What You Can Do About Them at The Family CEO.

Jason discusses Seven Reasons Why Being Rich Isn’t Evil at Hull Financial Planning.

Andrea explains Women and Retirement Planning: What You Need to do Different than Men at Take a Small Step.

Miranda asks Are Health Savings Accounts (HSAs) Going Away? at Cash Money Life.

Posts from Fellow NAPFA Members 

Kimberly Howard discusses The Current State Of Social Security at Figuide.com.

Claire Emory tell us that Monopoly Offers Lessons On Investing And Financial Planning at Figuide.com.   

Other financial articles from around the web

Christine Benz poses 5 Key Questions to Ask Before Purchasing an Equity-Indexed Annuity at morningstar.com.

Dan Solin sheds light on A Billion-Dollar Misunderstanding (in Gold) at usnews.com.

In case you missed it here is my latest contribution to the US News Smarter Investor Blog Beware of Financial Fraud. 

Here’s wishing everyone a great weekend.  

Photo credit:  Wikipedia

Target Date Funds are a staple of many 401(k) plans. Most Target Date Funds are funds of mutual funds. The three largest firms in the TDF space are Fidelity, T. Rowe Price, and Vanguard with a combined market share of about 80 percent. All three firms use only their own funds as the underlying investments in their target-date fund offerings. Some other firms offer other formats, such as funds of exchange-traded funds, but the fund of mutual funds is still the most common structure.

Here are 6 considerations to think about when deciding whether to use the Target Date Fund option in your company’s retirement savings plan:

Is the Glide Path really that important?

Much has been made of whether the Glide Path (a leveling of the fund’s equity allocation into retirement) should take investors to or through retirement. Target Date Fund providers spend a lot of time devising and administering the Glide Path that their funds use into and through your retirement years.   Before making too much of this, however, the key question is what will you do with your retirement plan dollars once you retire? TDF providers hope that you take the money invested in their Target Date Funds and roll these dollars into an IRA with them, maintaining your Target Date Fund position.  There are big dollars at stake for them.  In reality you might take your money out of the plan and do something else with it, including consolidating these funds with other retirement assets already in an IRA perhaps at another custodian.

How does the allocation of the Target Date Fund fit with your other investments? 

Many 401(k) participants invest their retirement dollars in a vacuum—meaning they don’t take their investments outside of the plan into consideration when making their investment choices. This is fine for younger workers just starting out.  Their 401(k) investment might be their only investment and the instant diversification of a Target Date Fund is fine here.

For those with other outside investments such as taxable accounts, a spouse’s retirement plan, and perhaps an IRA rolled over from old 401(k)s, this is a big mistake. Given that TDFs are funds of funds you might become over or under allocated in one or more areas and not know it as your account grows. Factoring the Target Date Fund allocation into your overall portfolio is critical. 

Is the Target Date Fund closest to your projected retirement date the right choice for you?

For example, a 2020 Target Date Fund is conceivably meant for someone who is 58 and retiring in seven years. If you were to take three 58-year-olds and look at their respective financial situations and tolerance for risk, it is likely that they are all fairly different. Plan providers need to do a better job of communicating to plan participants that the fund with the date closest to their projected retirement date may not be the right fund for their needs. Look at your own unique situation and pick the TDF that best fits your needs. 

Understand the underlying expenses

In some cases, the overall expense ratio may be a weighted average of the underlying funds. Others may also tack on a management fee to cover the costs of managing the fund. As with any investment, understand what you are being charged and what you are getting for your money. 

Target Date Funds don’t equate to low risk

Many participants are under the mistaken impression that investing in a Target Date Fund is a low risk proposition. As we saw in 2008, nothing could be further from the truth. Many investors in 2010 funds saw losses in excess of 20 percent. A recent review of more than 40 Target Date Fund families showed the share of stocks in the funds designed for those retiring in the current year ranged from about 25 percent to about 75 percent. As with any mutual fund, look under the hood and understand the level of risk that you will be assuming.

Investing in Target Date Funds doesn’t guarantee retirement success 

Contrary to the belief of some, investing in a Target Date Fund doesn’t guarantee that you will have enough saved at retirement.  Building a sufficient retirement nest egg is all about how much you save and how you invest those savings.  Target Date Funds may or may not be the best investment vehicle for your needs.

Target Date Funds can be a good vehicle for 401(k) participants and others who are not comfortable allocating their own investments. Unfortunately, TDFs are not a set it and forget it proposition. Investing in Target Date Funds requires periodic review to ensure that the fund you have chosen is still right for your situation. Retirement plan providers and sponsors also need to do a better job of communicating the benefits, pitfalls, and potential uses of these funds to plan participants.

Please feel free to contact me with questions about 401(k) investment options or about your overall financial and retirement planning needs.  Check out our Financial Planning and Investment Advice for Individuals page for more information about our services.  

For you do-it-yourselfers, check out Morningstar.com to analyze your Target Date Fund and all 401(k) investment options and to get a free trial for their premium services.  Please check out our Resources page for links to some additional tools and services that might be beneficial to you.  

Photo credit:  Flickr