21 Dec Is a target date fund right for me?
Q. I’m 50 and I have a Target 2040 fund in my 401(k). I’m thinking of retiring in 10 years, or 2027, which is earlier than I planned. Should I change the 401(k) allocation? There’s $820,000 in that account and I have $125,000 in an IRA, and only an emergency fund outside of that, but my mortgage is paid off.
A. Target funds are an easy way to take investment selections out of your hands, but they’re not work-free for you.
You need to make sure you’ve chosen the correct fund, for starters.
Your Target 2040 fund is most likely 85 percent in stocks, said Brian Power, a certified financial planner with Gateway Advisory, LLC in Westfield.
“That is typically a mix that a person in their 30s or 40s would have versus someone in their 50s,” Power said. “With that being said, age is not the only factor that should be considered when determining how much stock market exposure one should have.”
There are many other factors to consider.
One is job security.
“The more secure your current and future income is, the more aggressive you can be with your investments because there is a lower probability you would need to dip into your investments prior to retirement,” Power said.
Whether you have a pension is also an important factor.
“If you have strong cash flow in retirement and are not fully dependent on your investments to supplement your income, the more aggressive you can be now and in the future with your investments,” he said.
Then there’s your risk tolerance and how nervous you get when you see your accounts go down in value.
Power said if you can stomach seeing your money go down 30 to 40 percent, or by $250,000 to $300,000 — which is what happened to an 85 percent stock portfolio in 2008 — and not lose sleep, then having 85 percent in stocks shouldn’t be an issue.
Consider how much risk you need to take to reach your goals, he said.
“Most people would like to figure out which mixture of stocks, bonds and cash would help them achieve their retirement goals with the least amount of volatility,” he said. “You may be taking way more risk — trying to achieve a higher rate of return — then you really need.”
If you know what rate of return you need to achieve your goals, and you still take on more risk then you need to, it’s a decision made within the context of your financial goals, Power said.
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This post was first published in December 2016.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.