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Wealth Virtues Journal: March 4, 2010

Target Date Retirement Funds: For people that like taking the bus instead of driving themselves

Filed under: Saving and Investing — Tags: , , , — James Ward @ 8:43 pm
© 2009 Poor Richard Web Press, LLC

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I took a look at my 401K plan offerings.  In fact I make bi-weekly forays into my accounts to see how they are doing. I usually don’t make any drastic changes, but on occasion I take the time to reallocate my portfolio.  Several of the funds offered are these target date retirement funds which are touted as the “fund and forget” plans.  They usually have a date associated with them that is supposed to come close to your planned retirement date – The 2020 Fund, the 2030 Fund, and so on.  This sounds easy and convenient, doesn’t it? Just sit back and let some stranger decide risk tolerance for you and the thousands of other people enrolled in the fund.  I mean, you are all retiring at the same time – I guess you all have the same risk, right?

Now don’t let my cynicism get in the way of you investing in any of these funds, in fact it may actually be prudent to invest a portion of your retirement savings in one of these funds. What I think you should avoid is the blind trust that the particular fund you invest in will ensure you are secure retirement or even provide you with the necessary (or desired) risk protection as you get closer to that retirement date.  The reason for my caution is that many people do not know what the current fund holdings are and what are the changes being made to guarantee preservation of your acquired savings.  Yes, you can say that about most any fund to which you invest, though it is easy enough to find out a fund’s holdings using various online tools. However, that defeats the purpose of trusting the fund manager to make the right decisions about what stocks the fund holds.

Also consider that no two funds targeting the same date have the same results. Some people who invested all or a great portion of their retirement in a 2010 targeted fund found that they only lost 10% of the fund value during the 2008-2009 economic downturn.  That is pretty good considering the stock market value lost almost 50%.  Others invested in different 2010 targeted funds may have lost upwards of 40%.  Another thing to consider is the cost of the fund.  Some of these funds may charge up to 1%; pretty high for a fund, and a good chunk out of your earnings.

In my upcoming book, I write about an investing tool that can help provide you more control over managing your risk by providing more individually tailored recommendations based on your risk tolerance, your age, your current savings, your contributions, and your retirement goals. It is a tool that I use called Financial Engines.

Bill Sharpe, a recipient of the 1990 Nobel Prize in Economic Sciences, founded Financial Engines in 1996 when he realized that technology made it possible to offer the same sophisticated retirement help to individuals, regardless of their wealth or investment experience.

Financial Engines does not sell any investment products, nor do they earn a commission on recommendations to you. Rather, you pay a low yearly fee to get access to the online evaluation products.  Financial Engines allows you to enter in all the funds available to you in your 401k as well as any IRA or Roth IRA.  It will look across all of your available funds even if different firms manage those funds.

To get started, you enter in my information to include age, income, risk tolerance, and planned contributions, retirement goal, and the funds available to you in which to invest.  Financial Engines looks at all these factors (including stocks you hold in retirement accounts) to recommend individual funds and the percentage of your portfolio they should represent across each account.  You then follow the recommendations of Financial Engines to adjust your portfolio accordingly to match the recommendation.  As you get older, your risk tolerance may change to a more conservative position.  As you program risk to be lower, the recommended funds and their percentage in my portfolio will change.

You can find Financial Engines at I recommend them because I have had tremendous success with them as a means of evaluating my retirement accounts.  To be clear, I receive no compensation or endorsements from them.  I am simply a customer who has found them to be a key to my success.

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