Target date retirement funds are really getting a lot of attention lately. People are wondering if they are actually worth the paper that they are printed on. Sure, it’s tempting to think that you don’t have to really do too terribly much when it comes to these funds, but is that really the case? Is your money really well spent when it comes to these funds? That’s what we’re going to take a look at right now.
For those of you out of the loop, or those coming into these terms for the first time…allow us to back up just a bit. You see, target date retirement funds are funds that attempt to match a person’s age combined with their risk tolerance to an estimated retirement date.
One of the most popular TDFs would have to be the Vanguard Target Retirement 2050 Fund (on the NASDAQ under VFIFX), but it’s designed for people in their mid 20s. There’s even a TDF for people in their early 60s, which is the Vanguard Target Retirement 2015 Fund.
That’s a lot of dates!
Mutual funds aren’t always the best place to stick your money — especially if you’re young and you have a nice risk tolerance.
But here’s the problem: TDFs allow you to be way too lazy about investing. Sometimes lazy is a good thing — when we have software do the work of charting for us, that’s being lazy in a good way. Letting a formulaic and overused process for putting your money away for the future rather than studying asset allocation as it relates to your goals? Lazy in a bad way. Let’s not be lazy in a bad way. One size fits all investing may cheat you out of years of growth just because you weren’t thinking all of the details through. Bummer, man.
If the lazy factor wasn’t enough to steer you away, consider this — the fees are incredibly high with target date retirement funds. You’re looking at 0.62% annually, which is very inflated. Mutual funds aren’t even doing anything to earn those fees. Why throw your money down the drain instead of letting it fight to make more money for you? That’s the real way to wealth, in our opinion.
Longevity has to be the biggest reason to pass on these funds. They’re not tackling the age old question — will your money be able to outlive you? Far too often retirees are finding that they are going to run out of money to live on — forcing them to either think about going back to work, staying at work a little longer, or just making do with whatever they’ve got. That’s really not what you want to think about when you’re trying to go towards retirement, right? You want to think about how awesome retirement is going to be, because you won’t have to work. It’s supposed to be a time of rest and relaxation. But when you go with lazy funds like this, you could be risking opening yourself up to inflation — definitely not what you wanted at all.
A diversified fund needs to have a little something of everything. For example, does your fund do any commodities, or commodity index funds? What about global real estate or REITs? TIPS? International bonds?
Being exposed only to stocks isn’t being diversified enough — not in today’s market economy where everything seems up in the air.
Keep all of this in mind if you’re going to think about target date retirement funds. If you’re really set on having a “set it and forget it” approach, then this is better than just throwing money under your mattress…but not much better. You owe yourself a little more than what target date retirement funds provide.