Diversity in retirement planning is never a bad thing.
You are planning for retirement.
Perhaps you are nearing retirement age.
If yes, then you may want to take a look at your retirement strategy if it used target-date funds, according to the Kiplinger article titled “The Trouble with Target-Date Funds in Retirement.”
Why?
First, let us review what target-date funds are.
Target-date funds make investments based on the age you would like to retire.
Although they are great tools and quite popular, they are not the best in all situations.
If you have a 401(k) plan, these will often be the default investment options unless you indicate otherwise.
In fact, according to the Investment Company Institute, nearly half of all 401(k) participants had some money in a target-date fund at the end of 2014.
Who decides where the investments go?
These decisions are made by professional money managers who divide your assets to reach a goal.
Typically, these will adjust as you age.
When you are younger, the portfolio will be more aggressive.
As you age, it will become more conservative.
Important factors are "glide paths" and whether the target-date series "shifts to or through" retirement
What do each of these terms mean?
A glide path will change the mix of stocks and bonds over time.
A shift to retirement is when the stocks and bonds no longer adjust after hitting their target year.
A shift through retirement is when the stocks and bonds continue to adjust after hitting their target year—usually for 10 to 20 more years.
What should you consider if you have a glide path or a shift to retirement setup?
You should review the stocks and bonds divisions.
It may be a good idea to withdrawal the money and place it in an IRA.
Once the money is in an IRA, you can invest so your spending is covered by the proper amount of growth.
Are target-date funds personalized?
No.
They are designed to be one-size-fits-all investments.
This may not fit your specific needs as it adjusts along its glide path.
Similarly, there is little diversity in target-date funds.
You may want to add customization to your retirement portfolio beyond the typical, low-return stocks and bonds.
Can you withdrawal from specific investments only?
Unfortunately, there is little flexibility when it comes to withdrawing from target-date funds.
Withdrawals will be made proportionately from all of the allocated assets from the portfolio.
This could have significant tax implications.
Planning for retirement is unique to everyone and is not a fix-it-and-forget-it endeavor.
Work with an experienced financial advisor to create a plan specific to your needs.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
Reference: Kiplinger (April 7, 2017) “The Trouble with Target-Date Funds in Retirement”
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