| When it comes to planning your retirement, you | | | | retirement fund already allots money to multiple |
| may be thinking in terms of years. This is called | | | | different departments, it would defeat the |
| target dating your retirement because you are | | | | purpose for you to invest some of your money |
| setting a target date to retire, usually based on | | | | in other places on your own. Unless your other |
| your age or the amount of money you will have | | | | investments are a large part of your income, |
| saved by that point in time. In many cases, target | | | | there is no reason for you to be investing in the |
| dating your retirement plans is the easiest way to | | | | stock market outside of your target dated fund. |
| get your finds in line and set specific retirement | | | | Secondly, since target dated funds are usually |
| savings and investing goals. | | | | structured by the investment company ahead of |
| Definition: | | | | time, you will have little allowance to move |
| Target dated retirement is a method of planning | | | | money back and forth between departments. |
| your retirement based on a specific number of | | | | The structures set up by the investment |
| years away that you intend to retire. This can | | | | companies are modified based upon what has |
| mean five, ten, or even forty years away. You | | | | proven to be profitable and what has not. Thus, |
| then continually add money to a single target | | | | their structure is designed to have maximum |
| dated 401K plan which will automatically allocate | | | | efficiency over a long period of time. If you are |
| your investments and adjust them at five year | | | | moving money in and out of the stock exchange |
| intervals up until they day you actually retire. | | | | repeatedly, you are working against the inherent |
| Strategy: | | | | profitability of the structure. The investment |
| The theory behind target dated retirement funds | | | | company will automatically adjust your |
| is to make it easier for the average investor to | | | | investments at five year increment, meaning that |
| plan for their future without having to know | | | | you do not need to do any adjusting at all. |
| everything about the different methods, as well | | | | Downfalls: |
| as reducing the responsibility of having to manage | | | | There are multiple shortcomings associated with |
| the account regularly. | | | | target dated retirement funds as well. Firstly, |
| Lately, many companies have begun to offer | | | | depending on the fund company you are working |
| target dated retirement options along with their | | | | with, there could be some hidden fees for |
| 401K plans. This means that when you put the | | | | maintaining the fund. These fees may seem |
| money into the account it will be split up into | | | | irrelevant at the time of opening your retirement |
| multiple categories including: cash, bonds, stocks, | | | | fund, but over a number of years they can add |
| and other investments. | | | | up to a huge sum of money, that could have |
| Depending on your personal preferences you may | | | | been invested elsewhere. |
| choose between an aggressive approach that will | | | | There is also the possibility of commissions being |
| start you off with somewhere between 60-80% | | | | due to your broker, despite the fact that the |
| of your money invested in stocks, or a more | | | | target dated fund does all of the work for them. |
| conservative approach starting you with about | | | | Hence, you should avoid these commissioned fees |
| 50% stocks. | | | | entirely. You should also be aware of taxes placed |
| The rest of your money will be split between | | | | on the income earned from your investments. |
| cash and bonds, which involve a much smaller risk, | | | | While these taxes cannot be completely avoided, |
| and a very small percentage will be allotted to | | | | they can be reduced greatly by doing just a little |
| other investments. At every five year increment | | | | bit of research ahead of time. |
| the percentage of money allotted to stocks will | | | | Another downfall of a target dated retirement |
| be slightly reduced, and the amount allotted to | | | | fund is the limitation of options available to people |
| cash and bonds will be increased, until you are | | | | who are knowledgeable of the stock market. |
| invested in approximately 20% stocks, and the | | | | Many target dated funds are designed to be |
| rest of your investments are in less risky | | | | moderately risky, working towards conservative. |
| accounts. This way, any dip in the stock | | | | However, your personal preferences may require |
| exchange will have a much smaller effect on your | | | | a less risky approach or a more risky approach |
| retirement fund, and you will not have to make | | | | depending on the goals you have set. |
| up for as much in a shorter amount of time. | | | | In some cases, the retirement fund may not be |
| Stocks: | | | | aggressive enough for you to reach your |
| Stocks are often times a huge part of many | | | | retirement goals on time. In other cases, you |
| peoples' retirement plans, and the stock exchange | | | | may feel at risk because too much of your |
| can be both largely profitable as well as perilously | | | | money is invested in stocks at the time of your |
| risky. | | | | retirement. And within the overall structure, there |
| When you purchase stocks you are purchasing | | | | is a whole smaller breakdown within stocks |
| small pieces of a larger corporation. If that | | | | themselves, ultimately affecting how much of |
| particular corporation hits a point of financial | | | | your money is invested in large corporations |
| instability you risk losing everything you have | | | | versus mid-sized and small companies. |
| invested in them. However, if that same company | | | | If you have a lot of time before you actually |
| recovers and becomes very profitable, you could | | | | reach your retirement, it is wise to invest more in |
| make a huge profit. | | | | mid and small sized companies that have potential |
| Stocks are a very risky investment to make, and | | | | for huge growth over time, rather than investing |
| it is important that by the time you reach | | | | in well-established companies and hoping they |
| retirement you are not relying largely on stocks | | | | achieve a lot of growth. Studies have found that |
| for your retirement. As a beginning approach they | | | | only a small portion of your stock investments |
| are a very good way to increase your funds | | | | (between 5-15%) are invested in these smaller |
| exponentially and aggressively. | | | | companies to begin with, and that number is |
| Target dated retirement plans afford you the | | | | reduced greatly over time. |
| convenience of not having to study the | | | | The New Versus the Old: |
| companies you are investing in, and they often | | | | Despite the fact that these retirement funds are |
| include some overseas companies as well, adding | | | | designed to be a convenient option for everyone |
| to your chances of greater earnings. When you | | | | looking to invest in their retirement, the reality is |
| first open your target dated retirement fund, | | | | that target dated retirement funds may only be |
| your initial stock investment will make up about | | | | practical for certain people. |
| sixty to eighty percent of your total retirement | | | | If you are well educated in the ways of the stock |
| fund. At every five year interval, this amount will | | | | market and other investing methods, a target |
| be reduced until you have about twenty percent | | | | dated retirement may not have very much to |
| stocks at the time of retirement. | | | | offer you. However, if you are a new investor, |
| Bonds: | | | | and you are a little unsure of what you need to |
| When first beginning your target dated 401K plan, | | | | do, a target dated fund could be just right for |
| bonds will make up between fifteen and twenty | | | | you. Unfortunately, if only new investors are using |
| percent of your investments. This number will | | | | this approach, it is likely that they will never learn |
| slowly increase at five year intervals as the | | | | how the system works because these funds are |
| amount of money allotted to stocks is decreased. | | | | designed to take the work off the shoulders of |
| Bonds are considered a safer and more reliable | | | | the investor. |
| investment because they are based on interest | | | | Established investors may be disappointed by their |
| earned and are not subject to the fluctuations of | | | | lack of control over their investments, while new |
| the economy, or the success of a particular | | | | investors will feel comfortable with their funds, |
| company. Once again, the companies that you | | | | while having no understanding of what is going on |
| purchase bonds from will be decided by the | | | | with their money. The benefit is that target dated |
| company securing your 401K plan. Over time, the | | | | funds attract an audience that would normally |
| interest earned on your bonds will grow | | | | never risk money on stocks, nor any other |
| substantially, and as more money is channeled into | | | | investment outside of a standard savings account, |
| this section of your target date fund, more | | | | which means more profitability in the long run. |
| interest will be earned. | | | | Conclusion: |
| Other Investments: | | | | Target dated retirement funds, like anything else, |
| While other investments are the smallest portion | | | | have both pros and cons inherent within their |
| of your target dated retirement fund, they have | | | | theory of operation. Depending on whether or not |
| the potential to earn you a substantial amount of | | | | you already have a functional set of investments, |
| money. These investments can include pretty | | | | a target dated fund may or may not be right for |
| much anything outside of stocks and bonds such | | | | you. |
| as real estate. The percentage of money allotted | | | | Primarily, it is important to understand how a |
| to other investments does not change | | | | target dated fund works, and what your |
| substantially over time either up or down, since it | | | | responsibilities are when it comes to investing in |
| is usually less than one percent to begin with. | | | | one. You should know the initial breakdown of |
| Cash: | | | | your monies, and how this allotment will change |
| The cash portion of your target dated retirement | | | | over time. You need to have a solid understanding |
| fund usually starts between fifteen and twenty | | | | of what the risks and gains are associated with |
| percent, similar to your bonds. The cash allotment | | | | each and every part of your retirement fund. |
| acts exactly like a regular savings account or | | | | You also need to keep in mind that if you are |
| certificate of deposit. While it has potential to earn | | | | investing outside of your target dated fund you |
| you a small amount of interest over time, it is not | | | | are contradicting the purpose of the fund |
| a very aggressive approach to increasing your | | | | structure itself. Before you sign any agreements |
| retirement funds, but rather a conservative way | | | | to a target dated fund, make sure you are aware |
| to ensure that you will have money at the time | | | | of all of the fees and taxes associated with the |
| of your retirement. This money is essentially | | | | fund and how they will add up over a long period |
| guaranteed, so you do not run the risk of losing | | | | of time. This can greatly influence the amount of |
| anything by keeping your money in a cash | | | | profit gained from a particular account. |
| account. Every five years approaching your | | | | Once you have a solid understanding of the |
| retirement, a little more money will be pulled from | | | | function and operation of a target dated fund, it is |
| stocks and relocated into your cash fund to give | | | | time to get started, and begin investing as much |
| you a mostly conservative account at retirement. | | | | money as possible into this single account. You |
| Common Misconceptions: | | | | should not be terribly concerned over having too |
| Before you decide to go ahead with a target | | | | much money in one fund, since it is allotted in |
| dated retirement fund, make sure you have a | | | | many ways to give you an even distribution of |
| complete understanding of how the account will | | | | risk and guaranteed money. |
| work, and what you need to do to keep it | | | | Not all fund companies have a target dated |
| profitable. The most important thing to keep in | | | | retirement fund option, but it is becoming more |
| mind is that this retirement fund is designed to | | | | and more prevalent. Make sure to compare many |
| require minimum maintenance, but still cover all of | | | | different options to make sure that the structure |
| the bases. Once you have a target dated | | | | of your retirement funds fits your risk and |
| retirement fund, all of your retirement money | | | | conservation preferences ahead of time. |
| should be deposited into this account. Since this | | | | |