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What is a Target Date Fund, and Should I Invest in One?

What is a Target Date Fund, and Should I Invest in One?

Target date funds, or TDFs, have become very popular among investors in recent years. And if you’re opening a new 401(k), this may be an option to consider if you want to minimize the stress of adjusting your retirement strategy as you get older.

In the past, 401(k) participants would have to create their own blend of investments called an asset allocation, typically including an array of stocks, bonds and cash equivalents. Asset allocation should reflect the risk tolerance of the investor as well as the time horizon until the money is needed, usually retirement. Typically, a longer time horizon allows for greater risk, which might translate to a higher proportion of stocks and riskier investments, whereas a shorter time horizon warrants more conservative choices.

That means your investment strategy should include rebalancing the allocation periodically as the retirement or target date draws closer. And this requires monitoring investments and making decisions about what exactly to adjust from time to time.

But what if this could all be done automatically, with no action required on your part?

This is precisely what a target date fund aims to do. The manager of the fund constructs a strategy around a target date at which time the participant is expected to start withdrawing funds. This target date is typically the participant’s retirement date, although it can also be directed toward other needs, like a child’s college fund. The fund manager will periodically reallocate the investment mix, usually annually, to become more conservative as the target date draws closer.

The Upside

Good for hands-off investors. TDFs can be an excellent option for those who tend to avoid managing their investments but still want a steady path to retirement.

Simplicity. In theory, choosing a TDF could be the only investment decision you make, although this strategy may not always be advisable. Be sure to consult a qualified investment advisor.

Less intimidating. If you’re not particularly interesting in learning about different asset classes, mitigating risk and other issues an informed investor should understand, then a TDF offers a way to easily hand those decisions over to a professional.

The Downside

Not amenable to changing goals. If your investment goals suddenly change or you have to retire earlier or later than planned, you could find yourself poorly positioned if your money is invested in a TDF whose target date no longer matches up with your needs.

Potentially more expensive. As TDF’s are actively managed by a fund manager, they typically will have a higher expense ratio than a passively managed fund, such as an index fund - although it may be comparable to other actively managed funds.

Not all TDFs created equal. Different fund managers may manage risk differently. Even if two TDFs share the same target date, that doesn’t mean they will have similar investments. And this is important for a potential investor to understand before making a decision.

If your 401(k) offers a TDF, don’t hesitate to ask your financial advisor how the fund is structured and how often it’s rebalanced. And remember that even though you can “set it and forget it” when it comes to TDFs, you’re not locked in permanently. So do your research and see if this approach might be a good fit for you.



What is Risk Tolerance and Why Does It Matter for Your 401(k)?

What is Risk Tolerance and Why Does It Matter for Your 401(k)?

Risk tolerance is a term you may have heard about when determining your investment strategy. While you might picture activities such as rock climbing or jumping out of an airplane when you think of risk, it has a different meaning when it comes to investing.

Risk tolerance refers to how comfortable you are with volatility and periodic downturns in your investment portfolio. Investments come with a wide variety of associated risks. On the low end of the spectrum might be an FDIC-insured savings account, where you’ll have the confidence of knowing exactly how much money you’ll receive from a fixed interest rate — and a federally backed insurance program to protect your earnings should your bank go belly up.

At the other extreme are more speculative investments, whose value may rise and fall dramatically depending on market- and industry-specific conditions. While risk is somewhat in the eye of the beholder, many would point to things like cryptocurrency, investments in emerging markets or speculative technologies as among the riskier options available. And, of course, there’s every type of investment in between.

Even within a particular class of investments, the degree of risk can vary. Bonds are a good example. Bonds are rated in terms of the likelihood that the issuer will make good on their promise of payment. Bond rating agencies such as Standard and Poor’s (S&P) and Moody’s evaluate the credit risk of the issuers and assign letter grades accordingly — from AAA to C or D — depending on the agency. U.S. Treasury bonds are among the highest-rated bonds, whereas junk bonds are poorly rated.

Investment volatility is a double-edged sword because the opportunity for high growth typically requires some willingness to accept the risk of significant loss. And while it’s unlikely any investor would have an issue with unexpected gains, quite a few have trouble dealing with major losses. Selecting investments that are appropriate to your comfort level with the possibility of losing money from time to time is an important part of developing an individualized investment strategy.

Financial advisors often ask a number of questions to help gauge an investor’s risk tolerance. The advisor might inquire whether their clients had lost sleep or had trouble coping during previous downturns. They might also ask how much money they’re willing to lose for the chance to achieve high gains. Behavior such as checking investment status on a daily or weekly basis might also indicate a lower risk tolerance. You can also find useful quizzes online to help you determine what your risk factor is when it comes to your investments.

Once you’ve evaluated your risk tolerance, it’s critical to make sure that the asset allocation of your portfolio is appropriate for that level of risk. The amount of time you have until retirement is also an important consideration to keep in mind when evaluating investment risk. Generally, the closer you are to retiring, the less risk you should take since your investments will have less time to recover from any potential losses.

Suffering significant investment losses after retirement can compromise your standard of living once you no longer have an income — and this factor may even override your own personal risk tolerance if you’re an older worker making investment decisions. Younger investors, on the other hand, with more time until retirement, may have greater latitude in choosing just how risky they want their investments to be.

It’s wise to sit down with your financial advisor periodically to reassess your risk tolerance and help ensure that your investments continue to be appropriately allocated for your current level of tolerable risk.

How Much Should I Contribute to My 401(k)?

How Much Should I Contribute to My 401(k)?

The employer-sponsored 401(k) has largely replaced the company-funded pension plan as the primary source of retirement savings for most Americans. Unlike a pension, however, 401(k) benefits are not automatic. Employees must choose whether or not to participate and then decide how much to contribute and how to best invest their contributions.

One of the most important decisions you can make is how much of your earnings to contribute to your 401(k). While the answer to this question depends on your retirement goals, timeframe and income, there are some general guidelines to keep in mind.

Where to Start

Many experts agree that while anything is better than nothing, most workers should shoot for contributing at least 10% of their income to a retirement plan. It’s particularly important to invest enough to take full advantage of any matching contributions that your employer offers.

A matching contribution refers to any money that your employer adds to your retirement account that’s contingent on your own contributions. Sometimes, this is a dollar-for-dollar match. Other times, it may be $.50 on the dollar or some other percentage up to a given amount. Whatever the formula for your company’s match, you should try to invest enough to earn the maximum match offered. This is because the company match is essentially “free money” — and you won’t find a better deal than that anywhere in the investment universe.

Raise the Bar

Once you’re investing enough to benefit from the maximum company match and have gotten your contribution rate up to 10%, challenge yourself to raise the level even higher. Many experts recommend contributing 15% to 20%. If you start investing from the beginning, those early contributions have the greatest potential to grow.

Automate Contributions

Some companies offer automatic acceleration programs that gradually increase the amount of your contributions over time. Speak with your HR or benefits department to see if you can enroll. By making contributions and increases automatic, you can improve your chances of staying on track to fund a comfortable retirement for yourself.

While you may feel it’s challenging to put money aside from your paycheck, many workers find that automatic deductions allow them to acclimate their budgets relatively easily. And if you make it a habit to raise your contributions every time you get a pay raise, you’re less likely to feel like you’re taking a hit.

What If?

If you’re worried about committing to those contributions with each paycheck, don’t be. You can always stop or reduce them. Just because you set the contribution level at 15%, that doesn’t mean you have to keep it there. You may be able to change your contributions online or through your benefits department.

Contributing regularly to your 401(k) can be one of the most important things you do to prepare for a secure retirement. But it’s important to start early and contribute sufficiently to meet your goals. It can be extremely helpful to speak with a qualified financial advisor to help determine what makes sense for you.

Advantages of Opening a 401(k)

Advantages of Opening a 401(k)

You just started a new job and have come across information about your company’s 401(k) in your benefits paperwork. You may be wondering what exactly it is and whether you should sign up. The 401(k) plan got its name from the portion of the IRS tax code that governs its use. In the past, most employees received guaranteed monthly retirement income through an employer-funded pension plan. But those days are long gone, and the once common benefit has been largely replaced by the employer-sponsored, but employee-funded, 401(k). The good news is that 401(k)s offer a bevy of benefits and advantages all their own. And it’s important to fully understand them when deciding whether to enroll and how much of your income to contribute.

Employee match. Many employers match a portion of their workers’ 401(k) contributions up to a given amount. Sometimes, this is a dollar-for-dollar bonus; other times, it might be a percentage - up to a certain limit. For example, an employer might match $.50 on the dollar for employee contributions up to 6%. It’s important to speak with your HR department or benefits manager to understand what the policy is where you work because the 401(k) match is like getting free money in your retirement account, and you can’t find that guarantee anywhere else in the investment world.

Tax advantages. Pre-tax dollars fund your 401(k) contributions. That means with every contribution, you can lower your tax liability up to the allowable limits. This can help you save significantly over time. Additionally, your investment grows tax-deferred until you start making withdrawals, which are allowed without penalty once you reach age 59½. Contributions up to $19,500 are tax deductible in 2020.

After-tax contributions. It’s permissible to contribute even more than $19,500, although those additional dollars are not tax-deductible. In 2020, the IRS allows workers to contribute up to $57,000 in combined employee and employer contributions yearly to their 401(k) account. For those aged 50 and older, the limit goes up to $63,500.

Catch-up contributions. If you’ve fallen behind on your retirement-savings goals, you’re not alone. Fortunately, 401(k) regulations allow those over the age of 50 to contribute up to an extra $6,000 per year to help make up for lost time.

Fiduciary oversight. Since 401(k) plans are governed by the Employee Retirement Income Security Act (ERISA), your employer is mandated by law to put your interests above their own in terms of managing and administering your 401(k) investments. They’re obligated to make sure costs are reasonable and investment options are varied and appropriate. You may even have access to educational resources or professional investment advice.

Creditor protection.In most circumstances, 401(k) accounts cannot be seized by creditors. However, it’s important to note that there are some exceptions to this rule, particularly when it comes to IRS violations as well as other government garnishments or criminal fines.

Loan accessibility. Many programs allow participants to take a loan out against the funds in their account. However, if a loan is not paid back on time, it’s considered a taxable distribution and subject to the 10% early withdrawal penalty if you haven’t reached age 59½. The IRS permits those who leave their jobs in or after the year they reach age 55 to make withdrawals without penalty (although you must still pay income tax on that withdrawal). For qualified public safety employees, these distributions can occur if you separate from your employer in or after the year you turn 50. You may also be able to access your 401(k) funds without the 10% early withdrawal penalty in the event of a hardship, if you qualify.

Automatic savings. A number of 401(k) plans offer automatic enrollment as well as auto escalation of contributions. If you’re the kind of person who tends to put off making financial decisions, this can help you stay on track toward your retirement goals by getting on board early and raising your contribution levels regularly.

And if you’re worried about committing to making those contributions month after month, it’s important to remember that you can stop or reduce them if your circumstances change, so you’re not locked in. 401(k) plans offer numerous benefits for workers and can help them achieve their retirement goals - but only if they participate.




Hybrid Long-term Care Policies: A Flexible Alternative

Hybrid Long-term Care Policies: A Flexible Alternative

What if, one day, you can no longer dress yourself or tie your shoes? Someone turning 65 today has an almost 70% chance of needing some form of long-term care (LTC) sometime in the future. And while many receive in-home care from relatives, that’s not feasible for others. They may not have someone who’s able to help, or they may need more care than can be provided at home.

Finding long-term care is hard enough; paying for it can be an even bigger hurdle. Some elect to pay out of their savings. Others rely on a traditional LTC insurance policy; they pay a premium, and the policy pays a defined amount toward eligible in-home care, adult daycare, or Alzheimer’s support if they need it.

One downside of traditional, stand-alone LTC insurance is that, if the policy does not provide a fixed premium, the cost can escalate, sometimes exorbitantly, over time. And that time could be when you’re living on a fixed income and need the benefits.

Recently, a third option has emerged: the hybrid LTC policy, which combines life insurance or an annuity with long-term care. You can pay a lump sum upfront or a fixed premium over time, and you can receive one or the other benefit in return, depending on the policy you purchase. If you never need LTC, the policy can pay income like a traditional annuity or a death benefit like a traditional life insurance policy. If you do need LTC, the policy pays toward those costs in an amount you choose when you buy it. Depending on the policy, money provided for LTC would reduce the annuity or death benefits that you’d otherwise receive.

Return of premium riders on hybrid policies can also return most, if not all, of the premium cost in the death benefit or annuity. At the same time, the total available for LTC might be several times higher than the premium amount, offering additional value.

Hybrid LTC policies are also often purchasable with a lump sum of cash — something less available for traditional LTC insurance — and medical underwriting requirements may be less stringent.

But there are downsides to consider. Lump sum premiums that can run upwards of $50,000 to $100,000 are inaccessible for many individuals, and LTC policy payouts will reduce the cash value of a life insurance policy or the benefits paid to the beneficiary. In addition, with both traditional and hybrid LTC policies, you’re putting your future in the hands of an insurer — are you confident they’ll still be in business when you need them? Check their rating with AM Best, a credit-rating agency that evaluates insurers, before signing on the dotted line.




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