Answers in Retirement Planning

Ryan,

Lot of answers from well qualified people. But I am going to provide my 2 cents also.

Target Date Funds are turnkey funds for making life simple for Plan Sponsors and Employees. However, the answer to your question depends on who is managing the Fund and how they perceive the risks in bonds to be. It also depends on how this fits in your overall portfolio. If you are looking for simplicity and ease of use, these are great investment vehicles.

If your Target Date Fund has the fixed income portion invested in the broad bond market (tracking the Barclays Aggregate Bond Index), then there could be some issues, as this index is over weight U.S. Government Bonds, which will be a losing proposition in the next 5-10 years, as interest rates rise and these bonds lose value. For example, this index currently has a Duration over 5 and Yield To Maturity less than 2%, which implies that it will produce a 2% return if held to maturity, assuming interest rates do not rise. If interest rates do rise, based on Fed's tapering program, then one could lose principal as well.

Also, in some ways one could make the case that Domestic Equities are fairly valued. This is not to say that they could not keep rising from money flows and relative value trades. Needless to say it is a very challenging environment to add value both on the equity and fixed income asset classes.

The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.

Target Date funds are like the new easy button of investing. On paper they seem like an easier way to invest and forget about it, however, there are many more sophisticated ways to increase diversification and protect against losses. Investing is like anything else in that slight improvements can have huge long term implications. For the reasons listed by my colleagues in their insightful answers and the fact that target date funds are missing many asset classes that provide opportunity for gains and sources to protect with uncorrelated assets I feel that they are much lacking and not an easy button at all.

Target date funds have become popular because they provide some of the diversification that an asset allocation program does. However, they have several problems in actual practice. They were criticized for not doing a better job of protecting their shareholders during the market crash of 2008 - 2009. They provide a one-size-fits all solution rather than a specific solution to an individual need. They may not be as conservative as you think they are as they near their target date. They are designed to move more money from stocks funds into bond funds as you get older. This may seem to be a good idea, but many analysts are beginning to wonder how well these models will perform if interest rates rise and the value of bonds declines. You may want to see if you can get some professional guidance and create your own investment program using some of the other funds that are available in your plan to create a model that meets your needs and appetite for risk.

I have six main concerns. (1) The allocation may not be right for you because one size rarely fits all. (2) The future allocation may not be what is right for you (3) You may not understand what the current allocation is and how it changes over time (4) The diversification is only among funds in the same family and you may not have true diversification of investment styles (5) The same family rarely excels in both income and stock funds so the performance may not be as good as other funds available to you (6) Most people who choose one option do not have someone like a financial adviser to guide them.I would seek some help from a local fee-only adviser.

Probably not if you are the average USA worker. It does not matter whether you are blue collar, white collar or professional. If you want to maintain a certain lifestyle there are two options save more than you are currently saving or work longer than age 65. If you are asking the question you already know that you either started to late or are not putting enough away to retire at the medicare eligible age. Put pencil to paper and make a plan to save a lot. Behavioral investing will aid in developing a plan, sticking to it and be dedicated and committed to the plan. Review your income sources at retirement and you will discover that inflation and health care cost will be your biggest challenge while retired.

Carrin,

Providing a specific answer to this question is difficult without knowing the details of your financial situation. Deciding how much to save for retirement depends on how old you are, how much you’ve already saved, how much your spouse has saved (if you are married), and other factors. What percentage of your income are you currently saving? You ultimate retirement saving goal should be to set aside between 10% and 15% of your total income. If you’re not at that level, you can get there by gradually stepping up your savings rate. The important thing to realize is that saving just 2% or 3% of your income won’t be enough. Likewise, just contributing enough to get your employer match and not doing anything else is probably not enough to get you to your goal.

When putting together a retirement saving strategy, you also should think about your other financial goals (perhaps you want to fund a college education for your children, for example) and the kind of lifestyle you want in retirement. You also need to take inflation into account. There are a lot of variables to consider.

You can use a variety of online tools to help you estimate how much money you should be saving right now like Mint.com. Better yet, you can talk to an independent, fee-only financial planner, who will work with you to develop a personalized financial plan that will help you set aside enough money to fund the retirement you want.

Keep in mind: you save for a down payment on a home or car. You can "save for retirement" but you could look at it as investing for retirement. And as the others say, save as early as possible. Also, remember that you can borrow money for a child's education, a home purchase or a car; however you cannot borrow money for retirement. Pay yourself first!

We recommend a savings rate of 12 to 15%. If you are a participant in a retirement plan that includes your employer's match (if available). To start, consider deferring up to your employer's match in your retirement plan and then increasing your deferral rate by 1% a year until you reach your goal. We don't know of anyone who has retired and complained that they saved too much!

An IRA tax credit is a credit provided to a lower income earning tax payer for making a ROTH IRA contributions. The amount of the credit can range from 10, 20 or 50% up to $2,000 of your contribution. The percentage of the credit that you are entitled to is based on your annual adjusted gross income. This number can be found at the top of the second page of your 1040 tax return. For example a single filer with an adjusted gross income of $17,000 or less can claim a 50% credit on the first $2000 worth of contributions. This is a $1,000 tax credit! Remember a tax credit is different than a tax deduction. A credit is a dollar for dollar reduction of your tax liability, a tax deduction reduces your taxable income by the amount of the deduction and therefore reduces your tax liability.

The "retirement for dummies" answer is to save 10% of everything you ever made, invest it wisely and you will be able to enjoy the same lifestyle throughout your life. Read "The Richest Man in Babylon". OKAY, so much for what we ought to have done!

Many of us didn't follow that advice so the conversation gets way more complicated. How far along are you? How long can you work? Do you have a pension? What are the ways to extend your 'earned' income after partial retirement? Will the market return to 'normal' in our lifetime? How little could you spend and still be happy?

That's why we start with a plan that looks at 1) Your goals, 2) Your current situation, 3) What can you realistically achieve without starving today, 4) What can we conservatively project, 5) Where can we provide assurance, and 6) How can we adjust with the 'curve balls' life sends our way.

So start with a plan.

If you are in your 30's or early 40's, it's usually better to choose Roth over IRA. But before you choose anything make sure you are not giving up something of larger value, such as: 1) If your company plan provides a match, make sure you participate there, 2) Make sure you have a plan to build/replenish emergency savings, 3) Make sure your debts are decreasing.

There is nothing worse than working hard to build retirement funds, then to be forced to liquidate them for emergencies. I recommend a balance that makes you feel in control, and prepared for surprises.

While all of this is good advice, lets not lose the Forrest for the trees. What's most important is your savings rate and asset allocation. Next to those decisions the Roth/IRA decision is insignificant. A young professional saving 14% of income using an 80% equity portfolio will - 30, 40 years from now - run circles around one that defers 4% in a 40% equity portfolio- weather its pre-tax, post tax or anything in between. Get the deferral amount and allocation right, stay disciplined- and it will all work out just fine.

Julian and Don gave you some great advice. And for getting started at an early age, a Roth (either IRA or 401k) is a great first step.

But let's face it, you can't predict what your future earnings or tax rates will be. And unless you have a crystal ball, it's impossible to know what the best approach will be 40 years from now when you retire.

This can be hard to do, but try to imagine your life in retirement, and specifically replacing your paycheck with other sources of income. You need options for doing that in the most tax efficient way possible, which means you need three distinct buckets of money: 1) tax exempt, 2) tax deferred and 3) taxable.

With a Roth (tax exempt bucket) there's no upfront tax break, but in retirement you don't owe any tax on withdrawals. The same is not true of traditional IRAs (tax deferred bucket), because you got a pass from Uncle Sam on the contribution, you owe taxes when you take out your money. Individual accounts (taxable bucket) get no up front break, but offer capital gains rates which are preferable over earned income rates.

At your stage of life, the key is to just GET STARTED. Can you make the argument that the Roth probably is best for a young person long term? Yes, but if you told me you absolutely need the tax savings now, then open a traditional IRA. Either choice you make, you're headed in the right direction. And by the way, the kinds of investment you would ideally own in each tax bucket are not the same.

But that's for a different post!

Imagine you are a farmer and it is time to plant your crop. Uncle Sam offers you a choice, you can pay the tax you owe on the current value of the seeds you are about to plant or you can wait six months and pay the tax on the value of the crop. Most people would see the wisdom in paying it on the lower value of the seeds today. That is the same option you have with a traditional IRA and a Roth IRA. Pay the taxes on the lower amoount of money going into the Roth today, or pay taxes on the much larger value in the Tradtional IRA later.

Visit a local independent financial planner and look at the numbers.

The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above