If your 401k says anything like Target Date Fund 20XX, then you are invested in a one stop shop to have boat loads of cash at the year mentioned. Well.. not really because target date funds have a lot of road blocks and most likely won’t get you to the golden years feeling jazzed about your money situation.
A Target Date Fund is a grouping of stocks and bonds that are selected based on how much time you have until a retirement year, sometime in the future. The asset allocation is more growth oriented the longer you have. When the fund is getting closer to the set date, the investments become much more conservative to help preserve capital.
Because the target date fund will need to be closely watched by your investment managers and updated regularly, it requires more work. More work equals more compensation to the investment company. Which leads us to..
Target date funds are expensive
So you are set up in mutual funds and target date funds from your financial planer. How is this an expensive way to set up your financial game?
According to Morningstar, the average target date fund charges .73% which doesn’t sound like a lot initially. This doesn’t take into account any additional expenses by the fund choices inside of the target date fund. Its a fund inside of a fund which is also costing you money. On top of that every time the managers make a trade there is taxes charged and commissions/fees paid. Now once you add in the 1% your financial advisor charges, you may be paying close to 3% annually to be in this fund!
Factor in the average inflation of 3% and taxes when you take your money out and you’re left with a glorified savings account you worked your whole life for to pay other people.
This is a failing plan and needs an overhaul!
What should we do instead of target date funds?
Target date funds are going to erode your savings, and pay the wrong people first. They won’t get you the returns they are advertising and are ultimately no more than a savings account.
Saving is good don’t get me wrong! But saving alone is not going to get you where you want to be, nor will it help you earn a significant return on your money. And to be frank, rich people don’t keep their money this way, this is a poor strategy.
The best strategy we can follow is investing in the market. What does that mean? Invest in an S&P 500 Index Fund that tracks and follows the top 500 companies in the USA. This is essentially investing in America and believing our best companies are going to continue to produce. We have been an economic leader for the last 100 years and it doesn’t look like all that work is going to nothing. We will continue to be the richest country on earth.
The best option for an S&P 500 Index Fund is from Vanguard, the symbol is VFIAX. Vanguard is the leader in low cost indexing, and as an institution have values I stand behind. This is the fund I have a majority of my capital in and is something I will continue to put money into for the next 40 years!
Another strategy is the All Weather Fund which you can read about here:
All Weather Fund: Investing like the best!
If all this seems confusing and you’re unsure about the fees your paying, sign up for a One-on-One Coaching and we will understand your situation and help tweak it to set up up for success. Click the link here: One-on-One Coaching or find the tab at the top of the screen.