Targeting Retirement

I have been amazed by the number of folks I have talked to in the past week who have had their retirement plans put asunder by the recent market crash.

And to be blunt, it is (mostly) their fault.

One of the fundamental rules of saving for retirement is to shift your money to ever more conservative investments, as your retirement draws near.

And yet I can't tell you how many people in their 60s have told me that they had ALL of their money in stocks, even though they planned -- or, had planned -- to stop working within five years.

One way to keep this from happening to you is to use a "target date" mutual fund. They are also called life cycle funds.

There are "balanced" mutual funds -- i.e. the fund invests in stocks, bonds and cash -- that automatically reallocates your holdings to more conservative investments as the target date (for withdrawing your money) grows nearer.

For example, a target fund for someone planning to retire in 2035 might have just 15% of its money in bonds and cash. That same fund, with a target date of 2015, could have 40% of its money in fixed income investments today and by 2015 it could be 50%-50%. (Even once you are retired, you will want to have money in stocks, for the long-term growth prospects they provide.)

People who had a lifecycle fund targeted to 2008 would have had about half their money in cash equivalents and bonds as the market started to fall apart.

They would have been hurt, of course. But the damage would have been half as bad as what people with 100% of their retirement funds in stocks would have suffered.

If you aren't good about changing your asset allocation on your own, lifecycle funds are worth a look.