For years, we've been moving toward a "set it and forget it" lifestyle, to borrow a phrase from the great salesman Ron Popeil. Some of us just don't have the time or the patience to manage every detail in our lives, and as a result products like Popiel's Showtime Rotisserie and the crockpot are big hits. Over the last decade, investment firms have rolled out products that follow the same logic -- called target-date, or lifecycle, retirement funds.
These funds, which according to AARP are now present in more than half of all retirement plans, allow you to pick a basket of investments managed according to when you plan on retiring. So if you're 30 years old today, and you plan on working until you're 65, you might pick a fund that targets the year 2045 – 35 years from now. What does that mean? As you age, the fund will gradually shift from a more aggressive investment strategy to a more conservative one. Bonds will start pushing equities out. The fund makes these changes automatically, and asks for minimal involvement from you.
But You Still Have to Pay Attention
These funds can be very helpful in meeting your retirement needs, particularly if you don't have the time or know-how to be more hands on. But don't be fooled: setting it and forgetting it is not really an option. You still have to do some work. Make sure you:
• Pay attention. You always want to know what's going on with your money, even if someone else – or, in this case, a product like a target-date fund – is doing most of the managing. You should know what you're invested in, and how aggressive it is, because the asset allocations of these funds vary quite a bit, even among those targeted for the same retirement year. (Some funds targeted for investors retiring in the next year or two lost 30% and even 40% in value during the downturn). If you don't want to do the research on your own, get an hourly financial advisor (you can find one through www.garrettplanningnetwork.com) to go over your options with you before you put your money into anything. It will cost you less than a couple hundred bucks, and will be well worth it.
• Don't double up. A target-date retirement fund is designed to instantly diversify you. You'll have your hand in a wide variety of investments. That makes it difficult to keep from emphasizing a certain asset class if you want to also invest in equities outside of the fund, says Bill Losey, author of Retire in a Weekend. "If you're going to put money in a target-date fund, my advice is to put all your money into a target-date fund, unless you specifically want to overweight an asset class." Otherwise, you dilute what you're trying to do, which is diversify your investments to protect yourself.
• Pick the right fund. You want to select a fund that is in line with how aggressive you'd like to be. But you also want to pay attention to costs, which can suck up your earnings without you even realizing it. Some funds are actively managed, others are passively managed. You'll pay more for an actively managed fund, but you may also be compensated by higher returns (and the peace of mind that your money is being closely watched).
• Check in. Preferably once a quarter. Just take a look and make sure that the fund is rebalancing the way it should be, it's performing in line with the rest of the market, and you're happy with your investment. "Even investors who use these funds correctly, as a full retirement investment vehicle, need to pay attention. The asset allocation changes as your target date nears, and every fund company has its own philosophy about how to make those shifts," explains Losey. You may want to consider bringing that hourly planner back in once a year, just to give it a once-over.