Target Funds

[ktmarvels]

I don't have a lot of time or interest in managing our retirement accounts so I feel that target funds, (index funds which naturally get more conservite closer to the target date), would work for us. However I was wondering the best way to do it.

DH are both 27 and when I set up these accounts a couple of years ago we didn't have much of an issue. We reach 59.5 in 2042 (the earliest we could use the money w/o penalty), so I put 100% of our Roth contributions to a 2045 target fund and now that we have a TSP 100% goes to a 2040 target fund (the latest they have). So that's nice about that is as we approach 60, it will be the most conservative and not subject to free-falls like the stock market did the last couple years.

BUT... if we do actually retire in 2042, that money is just sitting there doing very little until we die (say 10-15+ years from then). Even if we don't retire then, that money still wouldn't be earning much.

Should we start contributing money to later target funds when they come available? Will it mess up the natural diversification set out by the target funds? If we do have multiple funds what is the best way to divvy out the funds? Equal amounts to each? Higher percentage to the furthest fund? The closest fund?

Thanks so much for your help. I've noticed Vanguard, who our Roth is through, now has a 2050 target fund and I'm curious to know if I should start contributing to it.

[jIM_Ohio]

Should we start contributing money to later target funds when they come available? Will it mess up the natural diversification set out by the target funds? If we do have multiple funds what is the best way to divvy out the funds? Equal amounts to each? Higher percentage to the furthest fund? The closest fund?

NO- I would not contribute to varying target date funds to diversify.

What you want to shoot for is a % stocks-% bonds. If you think the 2040 fund is too aggressive, change to 2030, if you think it is too conservative, change to 2050. If this confuses you, consider picking individual funds yourself.

Each target date fund should be able to tell you their formula for how much stocks/bonds they hold at varying degrees.

For example if target date is 15+ years out, my guess is it will hold 5% cash, 5% commodities, 5% bonds and the rest in equities. If in this example 85% stocks is too much risk for you, choose a fund with an earlier date.

When a fund is between years 8-15, it will start putting the "breaks" on and ramping up exposure to bonds and cash. What was 5% bonds at year 15+ might become 30% bonds at year 8. If 70% stocks and 30% bonds is too aggressive for you 8 years from retirement, choose a fund with an earlier date.

When you reach your target year, different fund companies will do different things. Might be a 30% stock-70% bonds and cash allocation. Some fund companies might keep the fund at 50% stocks and 50% bonds.

If the fund is ever to aggressive, choose a fund with an earlier date (2010 will be more conservative than 2020).

I know T Rowe Price states the 2020 fund will exist until 2030, then move all assets into its "retirement income" fund which is designed to be primarily a bond and cash fund making interest and dividend payments. Not all companies do it that way.

There is also the logic you could apply that use the 2040 fund to ACCUMULATE money when working, but once you retire, change to a retirement income fund (which suits your risk tolerance) to supply you with income.

I do not use target date funds- I spent some time to learn about asset allocation and manage my fund selections myself. But if you choose a target date fund, my advice would be have one date, one allocation and stick to it to keep it simple. If you need to change the allocation of the target date fund, just pick a better fund which suits your needs.

[kork13]

The TSP is going to open up the 2050 L-Fund in Jan 2011, at which point the 2010 L-Fund will roll into the Income L-Fund. So what you could do for now is contribute to the 2040 L-Fund, then once they open up the 2050 L-Fund, do a transfer to the 2050. Since it'll only be a year between now and then, I wouldn't worry about "throwing off" the fund's diversification. If the 2050 fund is what you want, use it. If you find you're happy shooting at 2040, leave it as-is.

Otherwise, I agree with Jim -- go all or nothing into a single L-Fund, not multiple ones of different dates. If you want that much control over your investments, just pick your own fund mix (with only 5 funds, it's pretty easy with the TSP... that's what I do for mine, though I my Roth is in a target date fund right now).