EDITOR’S NOTE: This is the first in a five-day series by Drummond Osborn about retirement savings. Do you have a question on the subject? Send it to Drummond@OsbornWealthManagement.com by Thursday and he will answer it in a special Q&A column Friday on WNLP.
It’s not exactly a Hallmark holiday, but National Save for Retirement Week is worth a bit of attention. After all, retirement is one of America’s top financial goals. Over these next five days, I’ll share some tips and tricks to help make saving and investing for retirement a little more meaningful.
We’ll start our series with a look at an investment option found in most every retirement plan and continue the week by addressing such issues as how to save enough for retirement, Roth 401(k), and what to do the day after you retire.
Have a question about investing or planning for retirement? Send me an e-mail and on Friday I’ll use this space to answer a few of your questions.
But for today, let’s take aim on a common retirement plan investment.
Target-Date Funds
Retirement target dates may be missing the mark, and nobody is paying attention. Confused by the array of investment options, many 401(k), 403(b) and IRA investors are opting for one-stop shopping for retirement investments by selecting Target-Date Funds – mutual funds that offer an auto-pilot ride to retirement. Retiring in 20 years? Picking any fund dated 2030 might be an option. But buyer beware. While two funds may have the same target date in their name, that’s as far as the similarities go. And with no simple benchmark for comparisons, homework is a must.
To or through retirement? A target date fund is designed to transition out of growth-oriented equities and into income-oriented bonds. But over what time frame? Is the fund designed to reach that magic balance on the first day of retirement, or is that fund designed to continue the transition through the typical 25-year retirement? This difference in methodology can lead to a huge performance disparity.
According to Investment News, “results among 2000-2010 funds, losses ranged anywhere from 9% to 40%.” That 31% performance swing was about much more than picking bad investments. It was about how funds with similar target dates had wide ranging differences in their allocation of stocks and bonds.
Take aim, don’t guess!
Target-date funds may seem the great one-stop investment, but too few investors take the time to REALLY understand what makes their investments tick:
1) Don’t settle for target date funds whose components are all from the same family of funds — no single fund family excels in all investment categories.
2) Make sure you understand the methodology of the fund. Have your 401k administrator or your IRA advisor explain it and show it to you.
3) As most individuals will sell their target-date fund at retirement, and then roll the funds into a IRA, investors will need to be very thoughtful about losing an auto-pilot investment and having to refocus their sights on investing.
WEDNESDAY: How to save enough for retirement.
D. DRUMMOND OSBORN, CFP, CTFA, is President & Senior Advisor of OSBORN Wealth Management, a fee-only registered investment advisory firm, and Co-Founder of RetirementProject.org. For 25 years, Drummond has provided clients with expert investment and retirement planning advice. His wisdom has been quoted by CNBC.com, USA Today Weekend, and BankRate.com, and his insight has been sought for numerous workshops and speaking engagements. Have a question? Send Drummond an e-mail and he’ll try to give you an answer in this very space on Friday: Drummond@OsbornWealthManagement.com.
