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Asked & Answered: Target Date Funds

1/26/2012

 

Neil from Narberth, PA:

 

Should I just put my 401k in a Target Date Fund?

 

Friedenthal Financial:

 

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

856-210-6494 (Office)

856-210-1565 (Facsimile)

info@friedenthalfinancial.com

www.friedenthalfinancial.com

 

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.

 

This blog is only intended to provide answers to questions of general interest we receive on the topics of investments, finance, capital markets, and economics and to serve as a historical repository for our e-mailed Asked & Answered column.  We are not rendering or offering to render personalized investment advice or financial planning advice through this blog or any of its attached links.  Friedenthal Financial will render investment advice to potential clients only after:  (i) we have delivered a disclosure statement to the potential client as required under applicable securities laws, and (ii) the potential client has executed and delivered Friedenthal Financial’s investment advisory contract to us.  We will provide investment advisory services to clients only in states in which Friedenthal Financial is registered as an investment adviser or is exempt from registration.