Investing in the market is not an easy thing to do. You have to do all sorts of research on investing terms, compare different stocks, mutual funds and other investments, and trying to make heads or tails of all of it can really be a nightmare if you’ve never taken a business class or know little about investing. Learning about investing is an important thing to do, but between juggling family, work, and everything else, there’s not a lot of time left over. In response to this, some mutual fund companies have created what they call targeted date retirement fund so that you can just throw money in a mutual fund and they will take care of the asset allocation for you.
Here’s how it works. You’ll have to sign-up for an account with a mutual company such as Vanguard, Schwab, T. Rowe Price, or Fidelity to buy into the fund. You can contribute to such a fund as you please, and the company will manage your money for you so that as you get closer to retirement, your investments get more conservative so that you are sure not subject to volatility in the market as you grow near retirement.
This sounds good in theory, but there are a couple of problems with these funds that make them undesirable. The first problem is that you are paying twice for mutual fund management fees. First, you’re paying the fee to have the targeted date retirement funds it self, and then you’re paying another fee for the mutual funds inside of the targeted date retirement fund. Having such high expense ratios can really be detrimental to your returns over a long period of time.
A lot of these funds also invest far too conservatively. If you invest in good mutual fund you can probably average 12% to 15% over a long period of time if the money is in a tax sheltered account such as a Roth IRA. If all of your money is in fixed income at age 65, your money won’t continue to grow, and you probably won’t end up leaving an inheritance. The reasoning they have such conservative investments is that one should want to minimize risk after retirement, however if you’re investing over a long period of time, you should have a few million dollars by retirement, and you can handle the volatility in the stock market because you’re only using a low percentage of your money each year. This way your money will continue to grow after your retirement and you’ll have a nice big juicy inheritance to leave to your family or worth charities.
There are a couple of investment firms which are an exception to the above statement. T.. Rowe Price’s retirement fund is a lot more aggressive than others and your money will continue to grow upon retirement. It gets conservative as you grow older, but not nearly as much as Vanguard’s and Schwab’s offerings.
Another issue with these funds is that they don’t assume your entire nest-egg. The whole idea of these is to manage the risk you are taking as time goes on. If you have some paid for real-estate and some cash reserves, you don’t need to be as conservative as people who are wholly reliant on their mutual fund for income. The percentages the mutual fund company gives your for asset allocation are not personal at all, and could very well be wrong for you.
You really should just avoid these funds all together. As much work as it is, you should take the effort and come up with some good growth stock mutual funds to invest in and fund them to retirement and beyond. It takes some work, but it’s worth the while.