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Target Retirement Funds

January 7th, 2007 at 06:56 am

Okay, I keep hearing about these things and reading about them and I just don't like them.

They sound so diversified and aggressive 90& stocks 10% bonds but what stocks are we talking about? If it is mostly safe, big US company stocks then are you really being aggressive? What if I said I had a portfolio of 70% large cap and 20% mid cap and 10% bonds would you even begin to think I was being an aggressive investor?

I think they give the people who buy them a false sense of security. I actually think alot of people, probably not on this board, think that if they invest in these funds they will have enough to retire on in 2040 or whenever. Put the money in and kaching without any other effort on your part you will have what you need.

I realize that I am still relatively new to handling my retirement investments and I even had a financial planner say I was too aggressive with too much in international funds (20%) I have a high risk tolerance because I have a fallback provision, a pension that pays 70% of my ending salary, so anything I make will be additional to that.

It bothers me though the way these 'lifecycle funds' are marketed. My personal experience is that if you let someone else manage it and don't get educated you lose.


6 Responses to “Target Retirement Funds”

  1. Carolina Bound Says:

    I can't help you, as I don't manage my retirement funds myself, but it sounds like you are doing very well, especially in your circumstances as a single mother.

  2. Broken Arrow Says:

    I certainly agree to research your your funds, and target retirement funds are no exception. That said, once you do research it, I think you'll find that not all of them are bad. The only thing target retirement funds are suppose to do anyway is to re-balance it periodically for you. But the point to know what you're getting into is definitely a good one.

  3. disneysteve Says:

    Let's look at one fund as an example. Vanguard Target Retirement Fund 2035 (VTTHX). It currently holds 71.9% total stock market index, 10.5% european stock index, 9.9% total bond market index, 5% pacific stock index and 2.7% emerging markets stock index. It has an expense ration of 0.21% which is ultra low.

    I'm not quite sure what your objection to these funds is. For someone who doesn't have the knowledge, time or inclination to research and manage all their own investments, I don't see anything wrong with these types of funds. They give instant diversification and automatically rebalance and become gradually more conservative as you get older. Whether or not you would have enough to retire obviously depends on how the funds perform and how much you invest.

    I'm also curious why your financial planner thought 20% in foreign funds was too high. That's a pretty common recommended allocation for a young investor. Though I don't know how old you are. Also, keep in mind how many pension funds have gotten frozen or been completely eliminated in recent years. You are smart to be investing on your own and not being totally dependent on that pension. You can't be sure that you will actually get what is promised (unless it is a government pension - I think those are safe).

  4. Diolla Says:

    It is a government pension.

    Looking at your example, It is not as bad as some I have seen but why would anyone planning to retire in 28 years want 10% in bonds? 70% in US equities is okay if there is a mix of small, mid and large cap stocks but when I look into the specific stocks that is not usually what I find.

    It isn't that they are bad investments, necessarily, but that they are marketed as a 'set it and forget it' I actually had someone say they were putting x amt in and then would have enough to retire on. That's how some people see these funds, like my pension with guaranteed benefits, not an investment with unpredictable results.

  5. livingalmostlarge Says:

    Because when you retire it's a good idea to still have a 60% stock/40% bond mix in your portfolio. I think 28 year is a huge amount of time to retirement and wouldn't plan on having bonds more than 10% until about 15 years and then maybe scaling back.

    Personally I will be invested mostly in stocks even after retirement, but then again I hope to retire early 55. I don't bother worrying about my retirement accounts because they are for retirement.

    Target retirement funds are superb for the average investor. Most people have no idea what a MF is, how to invest properly, they are better off in something that is low cost and directed like the Vanguard target funds. People love to chase returns which is the worse way to invest. This offers them a low cost, no emotion investing strategy. I think if you don't know what you are doing, and have no inclination they are great. If you do, then you could tailor your funds, otherwise, they are good.

    I personally manage my mom's 401k and she's retiring this year, but not drawing on her money. Thus she's invested 75% stocks and 25% bonds. We'll probably move her to 70/30 soon enough, but she's only 55. She can't draw until 59.5 unless she takes equitable distributions which she isn't going to. Soo...it's fine. And she doesn't need the money she gets a 70% pension. That's another reason to invest more aggressively if you know you'll get a defined benefit for the rest of your life.

  6. kv968 Says:

    I have to agree with the others. Target Retirement Funds are excellent choices for some people. Those who don't have the time nor the inclination to learn about investing will be well suited to put their money in one of those funds. Granted, the funds themselves should be researched and chosen to fit the person's situation, but as far as "set-it-and-forget-it" goes, they are one of the best funds to do it in.

    I agree, they aren't "the best" investments around. I personally choose my own asset allocations and investments but then I know a little bit about investing. For others who don't and don't want to pay a financial advisor, they can do quite well investing in them. And to reiterate what Steve said, why does your financial advisor think you're "too aggressive" with 20% int'l funds? If anything, that's normal and actually kind of low for an "aggressive" investor. That is as long as it's not in an emerging markets fund.

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