Put Your Retirement on Remote Control

By Theodore Fischer
October/November 2006

Special Report: Get Smart with Your Money (junio/julio 2006) Autopilot investing on AARP Bulletin Online (september 2006)

Creating or revamping a retirement portfolio can involve sorting through a mystifying array of stocks, mutual funds, certificates of deposit, and bonds. But with target-date lifecycle funds, your 401(k), IRA (individual retirement account), or other retirement vehicle requires just one decision: when you want to retire. The fund company does the rest.

“I had all kinds of funds that I managed myself, but it was stressful,” says Victor Cruz, 67, of Miami, Florida, who invests in one of these new funds. “Now I don’t have to worry about the ups and downs in the market.”

While these investments come in many flavors—Fidelity Freedom Funds, T. Rowe Price Retirement Funds, and Vanguard Target Retirement Funds, among others—all contain the same basic ingredients. Each firm markets a series of lifecycle funds set in five-year increments as far into the future as 2050. So if you plan to retire between 2028 and 2032, for example, you would buy a 2030 fund. Even with that election, though, you’re not locked in; it’s easy to later change your projected retirement date and your fund.

The mix of mutual funds and bonds becomes more conservative as the target date approaches. A 2030 fund typically consists of 90 percent stocks—a riskier, growth-oriented investment—and 10 percent long-term bonds. As the target date approaches, the ratio gradually shifts toward fewer stock funds, more bonds, and a small amount of cash and short-term bonds. At maturity, the resources move into very conservative income funds that yield steady monthly returns.

“The best things target funds do is create awareness that, as you get older, your portfolio should become more conservative,” says Mario Yngerto, a certified financial planner with Genesis Wealth Management in Plano, Texas. Yngerto recommends them to Hispanics who haven’t done a lot of investing and are still, he says, “a little gun-shy about the market.”

Before investing, be sure to check with a financial advisor or conduct your own research into these types of retirement funds.

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