Neil from Narberth, PA:
Should I just put my 401k in a Target Date Fund?
Great question! The two primary factors to consider are risk level and cost. While the concept of a Target Date Fund (based on your anticipated retirement date) is appealing, it presumes that everyone retiring around the same time should have the same portfolio. There are many other factors that should be considered when estimating your ability and willingness to take investment risk. The Target Date Fund may (or may not) serve the average person retiring at your scheduled time. You may or may not be that average person.
Your ability to take investment risk is primarily based on the timing of your anticipated need for withdrawal. This could be due to a material capital expenditure or simply the need to draw income in retirement (net of other income such as social security, pension, etc.) relative to your expected assets. Obviously, if you never needed to withdraw funds, you would have an unlimited time horizon and would conceptually think of these funds as going to heirs or charity (and thus have their ability to take risk).
Separately from your ability is your willingness to take risk. If you would liquidate investments because you can no longer stomach the decline, you have a reduced willingness to take risk. If your ability is great, you may still be better served by a more conservative portfolio, due to a limited willingness to take risk. If you need assistance estimating your ability & willingness to take risk, we recommend contacting your investment advisor.
Even if the Target Date Fund happens to have an appropriate risk profile for you, there may be more cost effective ways to create such a portfolio given the menu of choices in your 401k plan. We always recommend balancing diversification and cost structure when targeting a risk level within a 401k plan.
We hope that helps and provides fodder for discussion. Please let us know if we can be of further service!
The Friedenthal Financial Team
Please send us your questions!! If we don’t know the answers, we’ll find someone who does!
If you know someone who would like to discuss their investment needs with us, we certainly appreciate the introduction.