Thursday, January 18, 2007
Want to retire in 2025? 2050? No problem.
Want to retire in 2025? 2050? No problem.
2007 rolls around and investing is all about convenience. Never mind how much your funds are earning or who is managing your investments, convenience is the best return on investment!
New funds allow for any investor to simply set and forget their investment targets. Want to retire in 2045, there’s a fund for that! 2030? Yeah we have that too. And better yet we do all the balancing and even invest in other mutual funds for you! Great huh? Not exactly.
I’ll get to the goodies but first a short story.
I hadn’t any experience with these funds nor did I know that these funds existed until my sister, 25 and largely ignorant of finances, asked me to evaluate the plans that her new employer had to offer as a 401k benefit.
Let me tell you, the list was extremely exhausting! In her packet of probably what I would figure to be about 200 pages of 99% rubbish “we have to say this or you can sue us garbage.” The remaining two pages were compromised of a list of 9 funds. A choice of year 2010-2050 retirement investment mutual funds.
I consider my sister to be on par with most people out there who know nothing about retirement other than that the key to success is to save. Luckily enough though, my sister proved to be a rather open-eared client with some idea of a budget. (At least she was without a column for big screen plasma TVs on her budget.) She knew that someday she wanted to wakeup at 10am everyday, bum around, do the crossword puzzles in her local paper then hit the mall for 98509480953 laps around the mall with the rest of the 60somethings who probably didn’t invest in the mutual funds she was offered. They were straight up worthless!
So anyway, I tool back through the two pages that actually have some worth to them and attempt to make something out of the nothing the particular company has provided. (I won’t mention the mutual fund company because after some research, all timed investments happened to be less than great.
The list had various investments all with a timeframe. Basically, pick a timeframe you want to retire and it will happen. At least, that’s what is seemed like to my sister before I reminded her that if it was possible that she could retire in 2010, no one would be working. The pages seemed like the ultimate guide to retirement to anyone with minimal finance experience.
Picking a date for her retirement was easy. It wasn’t important that she retire anytime soon, she had just gotten out of medical school, and she could afford the risk of the longer timeframe accounts. 2050, the last choice on the menu, was my pick. It had the least amount of cash and moneymarket and the highest ratio of stocks to bonds.
This particular company must have only found it important to list the pie charts of stocks, bonds and cash holdings of each mutual fund offered. Honestly, if you make your decisions on this small amount of information you deserve to lose your money. Investing doesn’t work like this.
To her it seemed that if she picked the 2010 mutual fund it would mean that she would be able to retire sooner. I can see how this would be the case for most people. 2010 is closest and should yield the highest returns to get me to retirement, right? Nope.
Most professional money managers will tell you that the amount of risk you should take when you near retirement should be as low as possible but take higher risks when you’re younger because losses can always be corrected when you have that much time to ride out a possible storm.
The 2010 fund was probably 25% stocks and 75% bonds. Probably with an ROI of 6-7% a year but that wouldn’t be good enough for someone who is just beginning to save for retirement.
After some bickering, we settled on a retirement fund for her, dedicated the most she could of her income to the 401k to receive the benefit of the employer. And the remainder of the 10% of each check she dedicates to retirement to go to her IRA, where she can actually pick some decent funds.
Why are time based mutual funds so bad?
They charge extremely high funds for things that you should, as a future retiree, be doing. These particular funds that were offered charged high fees but were essentially funds of funds. Basically the manager of the funds in which my sister could invest took all of the money invested and divided it up into other mutual funds, then charged another fee on top of the other mutual fund fees for his or her “work.” If you ever plan to kick it back in retirement and just doze off those post-lunch afternoons, you’re going to have to do some research in your investments.
Another reason I would never recommend these funds is because they will soon be too saturated to provide decent returns. I can easily foresee every employer in the nation sacking their 401k choices for these new “convenience investments.” Some of the investment dollars are pawned off to other mutual funds but some are invested within the original time based fund into stocks. Fidelity is running into issues with some of their super money-heavy funds. Because so much money is invested into Fidelity’s mutual funds, they no longer have the liquidity or the ability to enter and exit trades without pushing the markets.
When funds top billions of dollars their buying and selling patterns can put a huge strain on the market as a whole. The US equities market is not nearly as big as we tend to think and can be easily influenced by billons of dollars, as we would expect.
Once more, the amount these funds charge to manage your money will add up to THOUSSANDS over time. They charge 1-2% per year, Vanguard funds charge less than .5% per year. The difference, over time and compounding, works out to possibly hundreds of thousands in your portfolio. If it is worth it to you to just invest in whatever they give you, no work on your part but you miss out on thousands of dollars, go ahead. The smart investor, and the one who will never run out of retirement dollars will invest in other funds as an individual.
I would take the time and invest “by hand.” If your employer offers mutual funds like these and only like these you should speak to your higher-ups about a change in plans. Until then, sock away as much as your employer would match but put your other money in better quality funds! You’ll save yourself thousands in fees in the long run and choose where YOU want your money, not where someone else thinks you should put your money.
Basically, if you get an employer match, max out what you can. If not, don’t invest in these funds, they just aren’t worth it.