I recently wrote about the popularity of Target-Date and Lifecycle Retirement Funds, what they are, and the pros and cons. In this article I describe how to choose one that is right for you and my favorite target-date funds. There are over 600 target-date funds and even though many have the same retirement date, there is great disparity in the asset allocation of those funds. This is one of the drawbacks, which is why you want to pick the one that matches your risk tolerance.
Your risk tolerance is based on your personal preferences, time horizon, what else you are invested in, and your SMART goals, among other things. Target-date funds are only based on the year you plan to retire, so the fund that matches your needs may not be the one that closely mirrors the year you want to retire. For example, if you want to retire in 2020, it is possible that the 2010 or 2030 fund is a better fit for you. In general, a fund that has more risk is one where the date is further away from today. Here are some things you need to take into consideration:
- Do you have other sources of retirement income? – If you do, you may be able to take more risk and choose a target date fund that has more exposure to equities.
- What type of retirement account is it? – If you have a large defined benefit pension, then you can probably take more risk. If you are in a 401(k) and this is your entire retirement portfolio, you may want to take less risk.
- Are you generally more conservative or aggressive? – The reason this is so personal is that there is a psychological component to risk tolerance. Some people are generally more risk adverse than others and don’t like any market volatility. If that is the case, you may want to choose one that is more conservative. Be careful here because you don’t want to expose yourself to inflation and longevity risk.
- Do you want an active or passive fund? – An active fund has professional fund managers that try to beat the market, sometimes they do, many times they don’t. You will generally pay a higher expense ratio for this. If you want to lower your expenses, then you may want to choose a passive one where the fund mirrors the market indices (represents the entire market, the average of all of the companies on the stock market, or a segment of the market).
You can go to morningstar or the the fund’s website to check what their asset allocation is like (how much stock, bonds, cash, or alternative investments each fund has). If a fund has more than 60% in stock, it may post significant gains when the market goes up, but can also go down when the market does down. Remember, you want to choose one that matches your risk tolerance! Here are my favorites below. I based my choices on:
- Consistent, Thoughtful Strategies
- Experienced, Successful Management
- Low Expenses
- Good Fiduciaries
|TARGET-DATE YEAR||ACTIVELY MANAGED FUND||SYMBOL(F-Class)*|
|TARGET-DATE 2000 – 2010||T. Rowe Price Retirement 2010 Fund||PARAX|
|TARGET-DATE 2010 – 2015||T. Rowe Price Retirement 2015 Fund||PARHX|
|TARGET-DATE 2016 – 2020||T. Rowe Price Retirement 2020 Fund||PARBX|
|TARGET-DATE 2021 – 2025||T. Rowe Price Retirement 2025 Fund||PARJX|
|TARGET-DATE 2026 – 2030||T. Rowe Price Retirement 2030 Fund||PARCX|
|TARGET-DATE 2031 – 2035||T. Rowe Price Retirement 2035 Fund||PARKX|
|TARGET-DATE 2036 – 2040||T. Rowe Price Retirement 2040 Fund||PARDX|
|TARGET-DATE 2041 – 2045||T. Rowe Price Retirement 2045 Fund||PARLX|
|TARGET-DATE 2046 – 2050||T. Rowe Price Retirement 2050 Fund||PARFX|
|TARGET-DATE 2051+||T. Rowe Price Retirement 2055 Fund||PAROX|
*As you can see, I am a big fan of the T.Rowe Target Date Funds and have used them for my clients for years. There are different classes of this fund, A-Class shares have a commission and I do not like funds with commissions. I use the F-Class Share, one that has no commission but generally you have to purchase them through a Registered Investment Adviser Firm that are fee-based, not commission based. This allows the client to not pay the commission and have more money working for them immediately.
|TARGET-DATE YEAR||PASSIVELY MANAGED FUND||SYMBOL*|
|TARGET-DATE 2000 – 2010||Vanguard Target Retirement 2010 Fund||VTENX|
|TARGET-DATE 2010 – 2015||Vanguard Target Retirement 2015 Fund||VTXVX|
|TARGET-DATE 2016 – 2020||Vanguard Target Retirement 2020 Fund||VTWNX|
|TARGET-DATE 2021 – 2025||Vanguard Target Retirement 2025 Fund||VTTVX|
|TARGET-DATE 2026 – 2030||Vanguard Target Retirement 2030 Fund||VTHRX|
|TARGET-DATE 2031 – 2035||Vanguard Target Retirement 2035 Fund||VTTHX|
|TARGET-DATE 2036 – 2040||Vanguard Target Retirement 2040 Fund||VFORX|
|TARGET-DATE 2041 – 2045||Vanguard Target Retirement 2045 Fund||VTIVX|
|TARGET-DATE 2046 – 2050||Vanguard Target Retirement 2050 Fund||VFIFX|
|TARGET-DATE 2051+||Vanguard Target Retirement 2055 Fund||VFFVX|
*Vanguard is my favorite low-cost Target-date fund. They are inherently tax efficient because they use index funds with low turnover. This means they don’t buy and sell a lot, so the transaction fees are low, and less taxes to pay.
DISCLAIMER: The information herein cannot replace or substitute the services of trained professionals that know your personal data, situation, knowledge, skill-set, goals, and risk tolerance. Further, all securities and investments mentioned are for illustrative purposes. The material presented should not be construed as a recommendation, offer, or solicitation of an offer, to buy or sell securities. The information does not constitute investment advice.
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