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Your Retirement: On Target
By MP Dunleavey Thursday April 15, 2010
Fairytale gone wrong Once upon a time, about 15 years ago, a fierce dragon was terrorizing a small village...
Wait, sorry! Wrong story.
Back in the 1990s, a terrible retirement problem was looming. Traditional pension plans were disappearing, 401k plans were taking their place. But few people understood how they worked (or wanted to join them). So companies began enrolling employees into retirement plans automatically—which solved one problem and created a bigger one.
Where do you invest all that cash?
A happy-ish ending
Along came band of sorcerers—um, investment companies—who worked their magic and created... insert tingly music here... a self-contained retirement portfolio that, like a TV dinner, would provide all the financial basics in one package.
Target date funds were designed so that average investors could park their money for 10, 20 or even 30 years—depending on the target retirement date—and a team of professional managers would safeguard their money and help it grow.
And it’s not a fairytale. While still imperfect, target date funds are proving to be a long-term investment solution for millions of people who otherwise might be too intimidated to manage their own money.
Bottom line
No one can cast a spell to make your money grow, but there are ways to make managing your nest egg easier. Learn, explore, ask lots of questions. Your net worth starts here.
MP is on hand to answer your basic investing queries today. Bring it on!
Comments
(11)
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Written by Teresa Huffer, April 15, 2010
How much is enough? There are so many variables. But let's say that when I retire, I don't work any part-time jobs. How much or what ratio do I need in my retirement account to be able to retire?
Written by Kenia, April 15, 2010
I have my portfolio allocated the way my financial adviser recommended, and it's nice to understand everything that's in there and why it's allocated the way it is (i.e. risk vs. retirement target date). That being said, how often should I rebalance my portfolio (quarterly, twice a year, annually?)? I don't think this is a straight-cut answer, but I would like your viewpoint to help me decide. My goal is to establish a schedule and stick with it, so that I'm following a system and not an emotional reaction. My other question is similar: How often should I meet with my financial adviser to reassess my appropriate risk-level and, as a result, my appropriate portfolio allocation? In other words, rather than just rebalancing an existing allocation, when should I schedule myself for a complete allocation change? Someone retiring in 10 years should have a much different allocation than someone retiring in 40 years, so could you frame your answer in terms of years until retirement?
Written by Cathy, April 15, 2010
Does it make sense to roll over my 401K now at age 27 into an IRA to avoid paying taxes when I retire?
Written by Dani, April 15, 2010
I'm starting from scratch. I'm self employed and have very little to start with but I realize if I don't start somthing now I will be eating cat food and wonder bread upon retirement:) I was hoping you could reccomend a place/type of fund or firm that I can start small with. Like maybe $25 a month just to get the ball rolling.
Written by MP Dunleavey, April 15, 2010
Kenia--the rule of thumb is to rebalance your portfolio once a year--and probably visit your planner for a tune-up once a year as well. If there's a major change in the markets or your circumstances, of course, sooner is better!
Cathy--Do you mean that you want to put your money into a Roth? You can roll over a 401k into a Roth; here's a link from Fidelity--http://bit.ly/cswLZi. But you may want to consult a fee-only financial planner for help.
Cathy--Do you mean that you want to put your money into a Roth? You can roll over a 401k into a Roth; here's a link from Fidelity--http://bit.ly/cswLZi. But you may want to consult a fee-only financial planner for help.
Written by MP Dunleavey, April 15, 2010
Teresa--That's such a complicated question. Here are some general rules: You need a nest egg big enough to last about 30 years, that will provide enough income for you to live on and cover medical expenses in that time. If your lifestyle is geared toward $50,000 per year now, and you don't want to work, you'll need enough money to generate the equivalent of $50,000 per year. (If you retire in 20 years, let's say, you'd end up requiring a larger amount, simply because of inflation.)
Dani--Call Vanguard, www.vanguard.com, an excellent place for beginning investors (and experienced ones as well!). They may be able to help you open an account with regular deposits of $25. If not, ask them who takes small amounts, or start there with a money market account (a glorified savings) and when it builds up, transfer to an index fund or target date fund. Good luck!
Dani--Call Vanguard, www.vanguard.com, an excellent place for beginning investors (and experienced ones as well!). They may be able to help you open an account with regular deposits of $25. If not, ask them who takes small amounts, or start there with a money market account (a glorified savings) and when it builds up, transfer to an index fund or target date fund. Good luck!
Written by Petunia, April 15, 2010
Vanguard is, in my opinion, the very best custodian of your investment money. However, you cannot get started with less than $1000, and the minimum additional investment amount is $100. T. Rowe Price will let you get started with $0 and a commitment of $50 per month. They are also a reputable no-load fund family and do offer some very good target retirement funds (they are on Money magazine's list of 70 best funds). The expenses are not rock bottom as they are at Vanguard, but they are still reasonable. If you really, really can't do $50 per month, then consider saving whatever you can in an online savings account until you have enough to get started in a decent mutual fund. There are a handful of decent choices if you have $250 to invest, and quite a few more if you have $500. Just get started. (With $250, you can invest in Pax World Balanced Fund. With $500, you can invest in any T. Rowe Price fund.)
Teresa - as MP said yours is a complicated question. The typical expert advice is that if you want your money to last your lifetime, you can withdraw at most 4% annually. So try working backwards from what you need. Do you need 20k annually? That will require a nest egg of 500k. Do you need 40k annually? That will require a nest egg of 1 million. Don't let the big number scare you, regular contributions and compound earnings can really go a long way.
Teresa - as MP said yours is a complicated question. The typical expert advice is that if you want your money to last your lifetime, you can withdraw at most 4% annually. So try working backwards from what you need. Do you need 20k annually? That will require a nest egg of 500k. Do you need 40k annually? That will require a nest egg of 1 million. Don't let the big number scare you, regular contributions and compound earnings can really go a long way.
Written by Petunia, April 15, 2010
I just read on Vanguard's website that you can do automatic investments as low as $50. There is only 1 Vanguard fund with a $1,000 minimum to open, most are $3,000 and a handful are even higher.
Written by MP Dunleavey, April 16, 2010
Thank you, Petunia! The thing to remember, people, is Ask, ask and always ask. They. Want. Your. Money. There may be a way to set up an account with $0 as long as you commit to depositing $25 a month (although Petunia is right, $50 is more common). But--ask. That's my live-by-it-die-by-it policy.
Last: $500,000 will allow you to draw down $20,000 annually (assuming you go with the 4% rule, which is debated, btw). BUT, but you also need to think about how much money in future you'll need to cover $20K worth of expenses, thanks to inflation. In 20 years, will $20K only buy $15K worth of goods? http://www.dailyworth.com/comp...?task=view
Last: $500,000 will allow you to draw down $20,000 annually (assuming you go with the 4% rule, which is debated, btw). BUT, but you also need to think about how much money in future you'll need to cover $20K worth of expenses, thanks to inflation. In 20 years, will $20K only buy $15K worth of goods? http://www.dailyworth.com/comp...?task=view
Written by Meg, April 17, 2010
I'd like to hear some thoughts on converting a 401k into a Roth. I have a 401k from an old job that has $9000 sitting in it. It took a horrid dive in 2008-2009 because of the markets, but now it's back up. Should I leave it be? I am not contributing to it - because I am getting matching in my current job's 401k (and that one has 30K in it). I've read that there are 2010 and 2011 tax rules that could be beneficial if you convert to a Roth, but I don't really know if it's worth it. I actually need to work on building up my emergency savings - so what should I do? Would welcome advice!
Written by Niro, April 21, 2010
Would love to see something on DW on having a will as part of financial planning... Now that we have a kid, we REALLY need to put one together, but are so confused on where to start. What is the different between having a will and having a trust? I'm told it has everything to do with minimizing taxes, but have no idea what all this means. Help!!!
