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234 The 1-2-3 Money Plan the phrase “the best thing since sliced bread?” Target-date retirement funds, at least the good ones, give sliced bread a run for its money. This is a one-stop-shop investment, a set-it-and-forget-it tool for retirement money, whether you’re still working or already in retire-ment. Pick a year you’ll probably retire, say 2030, and put all your retirement money into a 2030 target-date fund. Then you’re on autopilot. Most employers nowa-days offer these target-date options in 401(k) plans, and, of course, almost any mutual fund investment— including target-date funds—are an option in a self-directed retirement plan, such as an IRA or Roth IRA. Everybody should know the basics of retirement planning, so following is the shortest primer on retire-ment allocations you’ll ever see. But I contend that it suffices for most people. Spread your money around. Divvy up your money among major asset classes, typically U.S. stocks, foreign stocks, and bonds. Stocks, which refer to investing in private companies, are the higher-risk/higher-reward portion of your retirement bundle. Bonds are the safer portion. If one asset class grows quicker than the others, you have to “rebalance”—shift money around in your invest-ments—to get them back in line with your tar-geted allocations. Adjust your portfolio over time. When you’re younger, you can afford to take more risk because you have time to wait out any prolonged down-turn in the market. Therefore, portfolios for younger people have a greater portion of stocks and less of bonds. Conversely, as you approach From the Library of Wow! eBook How to Save Money 235 retirement or after you retire, you can’t afford to take as much risk because you’ll need the money soon. That’s why you want more bonds and less stocks. That brings us to target-date funds. Target funds do both of those things—diversify and rebalance— automatically. How do you choose a good target-date fund? If you’re in an employer-sponsored retirement plan, you probably only have one brand of target-date funds, so go with it. If you’re choosing among all investments— in an IRA or Roth IRA, for example—choose one from one of these three companies: Vanguard, www.vanguard.com T. Rowe Price, www.troweprice.com Fidelity, www.fidelity.com Of course, other companies offer good target-date funds too, but I’m here to make things easier. And these three companies offer excellent choices in target-date funds. If you want a nudge in a specific direction for open-ing a new account, check out Vanguard. It has the low-est built-in expenses, which is a good thing and arguably, over the long haul, the most important thing. If you have the minimum $3,000 to open an account, put all of it, including future contributions, in the Vanguard Target Retirement fund with a year closest to when you’ll retire. It will have a name like Vanguard Target Retirement 2030. From the Library of Wow! eBook 236 The 1-2-3 Money Plan QUICK TIP: TWEAKING TARGET DATE FUNDS What if you want to take more risk than the average person with your retirement portfolio, or less risk? Simply choose a different target-date fund. If you want to take on more risk for the opportunity to get larger returns, choose a target-date fund with a date that’s further away. It will have a higher portion in stocks. If you want less risk, choose a nearer target date. Don’t know if you’re a risk-taker? Take a quiz developed at Rutgers University, at http://njaes. rutgers.edu/money/riskquiz/. How freaked out did you get in 2008 when the stock market tanked? That’s a very accurate measure of your risk tolerance. What If Your Employer Doesn’t Offer a Target-Date Fund? If your 401(k) or other employer plan does not offer a target-date fund, retirement investing gets considerably more complicated. Get started by putting 60 percent in a broad stock index fund, such as a “total stock” index or “S&P 500” index. Put 20 percent in a foreign-stock index fund, and 20 percent in a bond index fund. But that’s a generic and conservative allocation. You’ll want to tweak that to fit your age and risk tolerance. One broad rule of thumb is to subtract your age from 120. That’s the percentage of your retirement money that should be invested in stocks. The rest goes in bonds. So a 40-year-old would have 80 percent overall in stocks (60 percent U.S. stocks, 20 percent foreign) and From the Library of Wow! eBook How to Save Money 237 20 percent in bonds. If you’re conservative, your stock-allocation percentage might be 100 minus your age. You’ll have to rebalance the allocations yourself, which again, refers to shifting money out of good-per-forming investments and putting the money into poorer performing ones. That’s counterintuitive. But when you rebalance, you’re essentially selling high and buying low, the most basic and best investing strategy. Rebalance at least once a year—on your birthday, for example—or when investment allocations get out of line by, say, 2 percent. Why Index Funds? An index mutual fund holds investments, such as stocks, that simply mimic an established index, such as the Standard & Poor’s 500 Index. Index funds don’t go searching for undervalued stocks ready to take off. In fact, index funds are dull and boring. And, oh yeah, they’re superior to most funds you’ll ever buy. Over time, index funds beat two-thirds to three-quarters of actively managed funds. How can that be? It’s because almost nobody, including the most brilliant minds on Wall Street, can consistently pick winning stocks over the long term. If some succeed over a short time, it’s just as likely to be dumb luck as bril-liance. Index funds are cheaper to operate because they don’t have to pay for a big-salary stock picker. And they incur less tax costs From the Library of Wow! eBook 238 The 1-2-3 Money Plan because they trade less than actively managed funds. Therefore, more of the gains from the fund are passed along to you, the investor. If you’re going to invest in mutual funds, whether inside a retirement account or outside, choose index funds. In fact, the target-date retirement funds I’m so fond of are the Vanguard ones. Why? You guessed it: It’s a bun-dle of index funds. This notion about index funds being superior to stock-picking funds is a fascinating topic. A famous book that lays out why it’s true is A Random Walk Down Wall Street by Burton G. Malkiel. QUICK TIP The amount of retirement contributions to put in your company stock should be zero percent, nada, nothing. You rely on this company for your income. That’s plenty of your financial life tied to a single company. If you want to invest some “gambling” money in company stock, go for it. Another exception might be if a generous company match is doled out in company stock. But do not invest retirement money that you’re counting on in company stock. Already have retirement money in company stock? Sell it—gradually, if you prefer—and invest the money in a target-date fund or well-diversified portfolio of funds. Hope I wasn’t unclear on this point. From the Library of Wow! eBook ... - tailieumienphi.vn