Of all the different options for investing in a retirement account, the target-date funds seem to get the most criticism. I’m actually relieved that my husband chose a fund because it gives me financial peace of mind. He didn’t try to outsmart the market. According to a recent article by Bloomberg, a lot of people are using target-date funds. The author suggests people who set and forget it with a target-date fund will later regret it. Data from the Investment Institute shows more than 50 percent of people in their 20s own target-date funds in their 401(k) accounts. Two in every five people who have 401(k) accounts used target-date funds in 2012, which is twice as many as 2006. Perhaps part of the reason I’m happy with my husband’s results is because he did it right.
Using an all-in-one solution
According to Bloomberg, the problem with target-date funds occurs when people mix and match with other mutual funds. Target-date funds have the right mix of bonds, stocks and short-term investments based on a person’s target retirement date or age. Meanwhile, people who mix and match skew the proper ratio of stocks, bonds and other investments. My husband puts 100 percent of his retirement money into just one target-date fund, which matches a retirement for him at age 70. A study by Financial Engines and Aon Hewitt cited by the Bloomberg article found 62 percent of target-date fund users mix and match. Most people allocate about a third of their money for target-date funds.
Risking too little or too much
Experts say people who have partial exposure to target-date funds have a lower investment performance of about 2 percent a year. One third of the people had too much risk and one-third had too little. Even though my husband does it the right way by going all in with his target-date fund, I’m the one who only toys with the fund in my own 401(k) account. I actually use several target-date funds because I can’t figure out a retirement date. I may retire at 60, 70 or even 80. Until I get a better vision of my future plans, I don’t know which fund is best for me.
Investing outside of the 401(k)
I think it’s important to diversify. I feel more confident about investing in individual stocks knowing that my husband has a more stable retirement account. I am more “aggressive” with my Rollover IRA, which could provide us with substantial returns by the time we each retire. On the other hand, the stock market might crash. If I experience another retirement account meltdown, I might be in trouble. It seems to me, the target-date funds are more conservative for people who need some security. When the market tanked in the past, my husband’s retirement account went down a little, but nothing drastic.
Now that I know about the study, I plan to put 100 percent of my future 401(k) dollars into a 2040 target-date fund. I may not actually retire at age 70, but I will delay withdrawing from my 401(k) until that 2040. Hopefully, I’ll have good results by managing my own IRA account. So far, my returns are keeping up with the benchmarks. And keeping up with the benchmark indexes will allow us to keep up with the Joneses in retirement.
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