Age-Based Funds: What You Need to Know Before Investing

by | Feb 6, 2013 | Podcasts, Retirement Planning

In this week’s Mullooly Asset Management podcast Tom and Brendan discuss target retirement funds and age-based funds. Their discussion begins by discussing why clients nearing retirement typically do not want to deal with the stock market. When clients are going to retire in the near future, the risk and volatility associated with the stock market is something that makes them nervous. This is justifiable because we are talking about the money they will be living off of shortly.

On the same note, Tom and Brendan discuss how 529 accounts shouldn’t be all in stocks when a child is getting close to college age. When a child has reached 16 or 17 years of age it would certainly be wiser to be invested in more conservative options, such as short term bonds.

The discussion moves onward to the topic of these age-based funds that Tom gets a lot of questions about. Like 401k plans and 529 accounts, these funds are meant to help save for things like college and retirement. The biggest sellers of these plans are companies like Vanguard, Fidelity, and T. Rowe Price. Tom and Brendan dissected the T. Rowe Price objective and investing strategy for their age-based funds. On the surface it actually seems pretty good, and it promises to be more conservative over time.

These age-based funds are marketed as a “set it and forget it” type investment that will be there for you when you need it for retirement. However, a closer look at what the fund offers shows otherwise. The T. Rowe Price 2040 fund (meant for somebody looking to retire around 2040) is 90% invested in stocks, which is a good thing. They are mostly invested in large cap stocks though, which according to our point and figure charts is not where you want to currently be. This fund doesn’t actually involve any stocks though. It is what we call a fund “of funds”, which means it is a basket of other mutual funds. This is one example of why you need to understand what you are getting involved in before investing.

The main issue that we have with these age-based funds is that the T. Rowe Price 2010 fund (meant for somebody who retired in 2010) is still 51% invested in stocks. We find this to be a bit risky for somebody who is on the vergeAge-Based Funds of retirement. An example of how this could backfire happened in 2008. This 2010 T. Rowe Price fund lost 26% in 2008. Two years before its holders were set to retire it lost a quarter of its money!

There is a lot you should know before getting involved with any age-based fund, and listening to this week’s Mullooly Asset Management podcast is a great place to start!

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