Get Your Retirement on Target

We're certain that you're smart and capable (not to mention good-looking), and so we're confident that you're the best person to make your own investment decisions. As such, we're not always fans of mutual funds that make your investment decisions for you, based on your target retirement date.

These funds can sometimes be too conservative, too racy, too costly, or too simplistic for your needs. However, that doesn't mean it's never a good idea to put your 401(k) savings into a target retirement fund. Here are three reasons to take aim.

Your 401(k) stinks
When you're stuck with a truly dismal 401(k) plan, a target retirement fund might bail you out of a bad situation. Consider investing in one if your other options consist only of expensive, underperforming mutual funds. Many target funds come from low-cost mutual fund companies, so they may be less pricey than your other options. Some also consist of a variety of index funds, letting you at least match the performance of the market.

That's not always true, though, so don't dive in until you've looked closely at the target retirement fund's expenses and its underlying investments. If they look acceptable -- even if they're not ideal -- you'll probably end up better off in the long run.

You're stymied
Typically, you can't get started saving money in your 401(k) plan until you sign up and choose your investments. That can be a hurdle for anyone who needs to find a few spare hours to sift through reams of prospectuses, and who has a few spare hours lying around? (If you do, send a few my way.)

If you're sitting on the sidelines, a target retirement fund will get you started, and that's the biggest key to a happy retirement. By not saving at all, you're giving up the opportunity to get the power of compounding interest working for you. You might also be leaving free money on the table. Invest enough to maximize your employer's matching contribution, and then block out some time to delve into your other options.

You're overwhelmed
You've come to the right place to study up on retirement planning, but you're not going to master every nuance overnight. While you're constructing your own plan, a target retirement fund can be a pretty good place to stash your money. It certainly beats a money market fund.

A target retirement fund will typically put some of your money to work in stocks, both domestic and international. It will also allocate a portion to something safer, like bonds. That basic formula buys you some time to figure out how you want to invest your money.

You can also use a target retirement fund as a template to start formulating your own investing philosophy. If you're a 45-year-old with plans to retire in 20 years, for example, you can start by comparing different approaches to asset allocation by looking at three of the biggest funds targeted to your retirement date.

At the more conservative end of the spectrum, you'll find Fidelity's Freedom Fund 2030 (FUND: FFFEX  ) putting 80% of its money in stocks and 20% in bonds. In the middle, Vanguard's Target Retirement 2030 (FUND: VTHRX  ) allocates 86% to stocks and 14% to bonds. More aggressively, T. Rowe Price's Retirement 2030 Fund (FUND: TRRCX  ) puts 91% in stocks and 9% in bonds.

All three companies build these target retirement funds with in-house mutual funds, and anchor them with a large-cap equity fund, but they're not all alike in that respect, either. Digging into the details of these funds reveals some interesting differences.

Vanguard, as you might expect, gives an index fund the top slot. Its Total Stock Market Index fund (FUND: VTSMX  ) sops up 69% of the fund's holdings, with ExxonMobil (NYSE: XOM  ) as its top stock. T. Rowe Price makes its Growth Stock (FUND: PRGFX  ) fund the biggest player, holding General Electric (NYSE: GE  ) and Google (Nasdaq: GOOG  ) in its top positions. The Fidelity Disciplined Equity Fund (FUND: FDEQX  ) , where Hewlett-Packard (NYSE: HPQ  ) , ConocoPhillips (NYSE: COP  ) , and JPMorgan Chase (NYSE: JPM  ) are among the top holdings, leads that company's target fund.

Of course, asset allocation's just one aspect of retirement planning. Keep reading to learn the Fool's four rules of asset allocation, and:

Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 618378, ~/Articles/ArticleHandler.aspx, 10/26/2016 7:05:21 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,199.33 30.06 0.17%
S&P 500 2,139.43 -3.73 -0.17%
NASD 5,250.27 -33.13 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/26/2016 4:03 PM
COP $41.80 Down -0.01 -0.02%
ConocoPhillips CAPS Rating: ****
GE $28.87 Up +0.22 +0.77%
General Electric CAPS Rating: ****
GOOGL $822.10 Down -6.45 -0.78%
Alphabet (A shares… CAPS Rating: *****
HPQ $13.91 Up +0.01 +0.07%
HP CAPS Rating: ***
JPM $69.13 Up +0.33 +0.48%
JPMorgan Chase CAPS Rating: ****
XOM $87.09 Up +0.37 +0.43%
ExxonMobil CAPS Rating: ****