Old elderly dementia alzheimers 311 STOCK.
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With many individuals too busy or indifferent to deal with their retirement
savings, a relatively new product called Target Date Retirement Funds (TDFs) has
surged in popularity. It’s like a one-stop shop for retirement
How does it work?
We speak a lot about the need to set up a
well-diversified portfolio of both stocks and bonds and how to keep it current
with your current stage in life. As you are younger and have more time until you
retire, you can afford, statistically, to be growth oriented in your investment
strategy. But if you are nearing retirement age, chances are that you will need
to have a much more conservative portfolio that will generate the income you
need to live off of.
TDFs work like this: First, you pick a fund with a
date that matches your approximate retirement age. For example, if you are 30
years old and you plan to retire at 65, you pick a target date of 2045. It’s
important to note that the funds come with dates that have increments of five
The fund manager invests your money in a well-diversified
portfolio of bonds and stocks according to various mathematical models on how
exactly one should diversify. The risk profile matches what is an appropriate
one for someone your age. As you get closer to retirement the fund is
theoretically supposed to become much more conservative.Reallocates for
I would say that the best feature these funds offer is that they
automatically update and reallocate your portfolio as you get older. Whatever
asset mix the fund starts out with, it automatically shifts money from stocks
into bonds and cash over time, so that the portfolio becomes more conservative
and less volatile as you approach retirement.
By the time you retire, the
fund is mostly invested in bonds and cash, with a modest stock position to
provide some longterm growth. The benefit to you, the investor, is that you
don’t have to do anything: You have a one-stop, well-diversified portfolio that
is constantly being updated. You can concentrate on your family or your work and
not have to give a second thought about whether you are investing
What are the advantages?
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I view these types of mutual funds as
providing two very important services for investors. One is that they provide a
hassle- and time-free way to save for your retirement, while giving you the
confidence that your money is being invested in a long-term investment vehicle
that fits your personal time horizon. The second reason – more cynical but no
less important – is that these funds help save investors from themselves.
Investors often hear a tip form someone or have their own good idea and feel
compelled to act on them, even though it will have adverse effects on their
overall portfolio. With TDFs that issue will not arise because they are
managed funds.What’s the downside?
While at first glance TDFs seem like
a perfect investment, they continue to come under fire from many analysts who
say they don’t deliver what they promise.
According to a Reuters report:
“TDFs have come under fire for maintaining high equity allocations even in funds
tailored for investors near retirement age. Many TDF investors near retirement
age suffered dramatic losses in the 2008 market crash. Target funds with
dates between 2000 and 2010 lost 22.5 percent in 2008, and funds with target
dates between 2011 and 2015 lost 28 percent, according to Morningstar. But those
are broad averages; some funds with dates as early as 2010 lost as much as 50
percent of their value in 2008.”
This is obviously not what someone about
to retire had in mind when making this investment. As such, these analysts
believe investors doing retirement planning should either work with an adviser
or a fee-based financial planner to personalize a retirement plan that better
suits their specific investment profile.
Therefore, before deciding on
whether TDFs are appropriate for you, speak with a financial professional to
work through all the pluses and minuses.
Aaron Katsman is a licensed financial adviser in Israel and the United States
who helps people with US investment accounts.
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