You’ve put money into your company’s 401k, or maybe you’ve started your own IRA, but now you’re overwhelmed by the number of options. The intimidation is real. You’re entering a territory that few of us are comfortable with, but it doesn’t need to be this way. I’m going to walk through an option with you that will break down that intimidation and offer you a comfortable place to invest your retirement dollars, Target Date Funds (TDFs).
Imagine you have a 45-minute commute to work (your retirement path). You have the choice between taking a self-driving car or the constant dance between the gas and brake in stop and go traffic. Likely, one of these experiences is going to be more stressful than the other. The typical car will have you gripping the wheel, making 100 decisions along the way (not my favorite way to start or end a day). The self-driving car will allow you to sit back and enjoy the ride on the way to your destination. Sitting back and enjoying the ride are TDFs.
Target Date Funds (or LifeCycle Funds) have become popular investment tools and for damn good reason. They take a lot of the work out of planning for retirement at a cost much lower than working with a financial advisor. TDFs are an excellent tool for anyone already investing in their retirement. They are even better for anyone who’s getting started by taking down the intimidation and getting you into action.
Many of us know that we should be putting money towards retirement, but we’re unsure where to start. The intimidation of hopping onto that congested freeway can keep us from ever getting started; this is the worst-case scenario. I’ll save you the rant on compound interest. The most important step in investing in your future is literally to just start. TDFs are the easy way to get that start in a very effective and efficient manner.
Why Target Date Funds?
Conventional wisdom recommends modifying your risk as you get closer to retirement. This is to conserve that nest egg you’ve been contributing to over a long period of time.
Example: If your entire retirement account was in the S&P 500 (stocks) in 2008 on the cusp of retirement, you would’ve lost ~57% of your retirement, and it would’ve taken years to recover. If you were planning to retire in 2010, this would’ve put you back for an extra handful of years. On the cusp of that beach and mountain time? You’d be back at the 9 to 5 daydreaming instead of living.
TDFs work by automatically rebalancing your portfolio over time to align with your expected retirement date. As you get closer to that date, your portfolio becomes more conservative. Instead of becoming an expert on asset allocation and rebalancing, these types of funds do that work for you, and the best part is this is all done at a fraction of the price of a financial advisor.
No Irrational Decisions
Ever been in traffic and hit an incident where the whole interstate has come to a halt? You decide that you can figure this out, and you take the random detour. You then find yourself stuck in another place worse off than when you started. I used to do that shit all the time. You think you can beat the log-jam on the interstate by taking the frontage road? Good luck.
When traffic is going through its natural rhythm (stock market) of incidents and road construction, the self-driving car (TDFs) keeps you on course. You set it up and keep your hands off the wheel. This keeps you from making short-term decisions that could derail your best long-term path. We all have these impulses; we’re human. That’s why the TDFs are great. They keep us from ourselves in a moment of emotion. This is especially helpful for me as I grew up in a family with a competitive edge. I got thrown out of my first baseball game when I was 15. Don’t judge.
Paying More to Get to the Same Place – Financial Advisors
On your commute, you could also hire an Uber driver every day to get you to work. They’re going to do the same thing as the self-driving car, but it’s going to cost you more to do so. Possibly more than $500,000 over the course of your investing. $4 lattes are not the worst enemy.
Not all financial advisors are bad. They’re just not for most of us. Compensation for financial advisors comes from products their company incentivizes them to sell. What they’re selling isn’t necessarily going to help you any more than TDFs, but it’s going to cost you a lot more (see above) to work with them.
Not Perfect, But Real Close
Even though I personally invest in TDFs and I recommend them to 95% of people I work with, there can be times where specific individuals may opt to drive their own car. These are the people that want to be very hands-on with their investments (think working on your car for hours in your garage every month). Some people love nerding out on asset allocation, foreign stocks, and ETFs. If you like those words as much as I do, you’d rather spend your weekends sipping on a beverage or trying that new slice of pizza down the street.
Critics of TDFs will say that they can be too conservative at times. This is dependent on your risk tolerance (Note: One way to mitigate this is to pick a TDF with a date later than your retirement goal to increase aggressiveness). There are situations where this may be true, but at this point, we’re fretting over the finer details. If you’ve started investing because you found an easy, efficient path, you’re already doing great.
Conclusion
If you haven’t started saving for retirement because you don’t know where to start, TDFs are a great place to begin. If you’ve signed up for a retirement account, but your funds are in some gibberish fund you don’t understand, this is also a great place to adjust and set the cruise control. Retirement planning doesn’t need to be complicated; it can be reliable and easy.
