People want it easy. The trouble is, life is hard. Saving for your retirement is the same way. It's harder when you consider everything you don't know. This is the dilemma facing all retirement savers. But it's a challenge rife with opportunity for professionals providing advice to that market. Here's how.
Qualified default investment alternatives include both target date funds and target risk (aka “lifestyle”) funds. While the former has the track record, the latter has something better—the allure of ease.
Target risk funds are defined by their familiar “aggressive,” “moderate,” and “conservative” descriptions. Target date funds are defined by their singular characteristic—their date. This trait plays to the typical retirement saver's need for ease. It's as simple as answering the question “What year will I retire?” and plugging everything into the target date fund with a date closest to that year.
Ah, if only reality were this easy. We all know it's more important to focus on maximizing savings rather than concentrating on finding the “perfect” investment. Beyond that, many financial professionals agree the retirement saver's “goal-oriented target” (“GOT”) is far more revealing than one's year of retirement. A GOT is similar to a personal required rate of return given a retirement saver's current retirement assets, annual contributions, and number of years left until retirement. Since all three of these factors can be adjusted by the individual retirement saver, that saver has the ability to fine-tune their GOT to an acceptable level.
What's an acceptable level? That's where the investment advisor comes into play. Once the GOT is determined, then it's a matter of finding the correct balanced fund to invest in. In almost all cases, the retirement saver might be better served with a target risk fund rather than a fund that's based on the date of their retirement.
Take two individuals, both the same age and both retiring the same year. Under the target date regime, they would both invest in the same target date fund. But what if one is already independently wealthy and seeking to preserve assets (i.e., meeting or exceeding the inflation rate of, say, 2 percent) while the other must grow their assets at 8 percent a year? The first person has a GOT of 2 percent, while the second has a GOT of 8 percent. Would a knowledgeable professional place them in the same exact fund? No. Chances are, the 2 percent GOT retirement saver would go into a “conservative” balanced fund and the 8 percent GOT retirement saver would go into an “aggressive” balanced fund.
The retirement saver might not know this, but the financial professional will.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
