Target Date Funds

If you've selected a target-date fund in your workplace retirement savings account, listen as Northstar Financial and Retirement Planning founder George Fossing and CFP Zach Jenkins discuss the pros and cons of such funds. They also explore other options for retirement savings.

Transcript

Speaker 0:02

This is Stop Worrying. You're retired with the team from Northstar Financial and Retirement Planning. George Fossing, the founder of Northstar, Zach Jenkins, Certified Financial Planner, and Travis Smith, CPA, all our fiduciary financial advisors. Along with the Northstar team, I'm Cheryl White. And now let's get started. Here on Stop Worrying, you're retired. I thought we would talk today a little bit about target date funds. I know we mentioned it in past shows, but I'd like to go a little deeper today. So you know they are really a go-to choice when you're contributing to a 401k, let's say, at work. It makes sense. So when do you plan to retire? Okay, well, there's a target date fund for that. Is that a good idea? Or is there something that we can do later on as we get closer to retirement?

Speaker 2 0:56

Yeah, it's interesting. Uh target date funds, you'll see that 2025 or 2030 or 2035 or something like that at the end. And, you know, you think, oh, I'll line that up just as you said, Cheryl, with when I'm going to retire. It's interesting. Jim, our chief financial officer, he was doing an analysis on some of the target date funds from Vanguard and Fidelity. And what he was able to find is that they're they really weren't that different. And I'm not just talking about between the two companies. I'm talking about between the years. So like the 2025, the 2030, and the 2035. The way that we measure risk is we look to see what a drawdown, all right, like a worst-case scenario is going to be on funds performance during something like a 2008 or a 2022. And the drawdown on the 2025 version that he was looking at from one of these companies and the 2035 version was similar. And that can affect the other side of the fund, which is the bond portfolio, that piece of the fund. So I hate to use the word lazy. Um, but really when it comes to your planning as you're approaching retirement. Now, maybe if you're being more aggressive because you're, you know, you're in your 30s or your 40s and you've got 20 or 30 more years of work in front of you, then it might be okay to have one of those that's out there, or just something regular SP or something like that, some of these other offerings inside of 401ks. But if you're within five or ten years of retirement, I would really check that. You can research it to see what's in the fund, or you can call us and we can do it, or a financial professional should be able to help you if you have one. Uh so I think that you have to go under the hood. You can't just take the name of the funds for granted. You have to say, okay, it says this, this is the name of the fund, but is that really what it is? Is it aligned with with me and my family and where I am if I'm looking to retire in the next two years?

Speaker 3:19

Isn't that the whole idea behind a target date fund? Is that it lowers risk as you get closer to retirement?

Speaker 2 3:25

Well, yeah. I mean, George could speak to this. I mean, it used to be the 60/40 model, that was like a the standard, right?

Speaker 1 3:35

60% stock portfolio, 40% bond. Yeah. Bond being what? Representing the safe. The safe money. Right.

Speaker 2 3:42

So that's what these funds are made up of. But if you go to 2022, that's your most recent example, and you have a picture there where some bonds were down as much as 15 or 20 percent, some even more than that. And and that was because the Fed was raising rates. Well, that made bonds that were currently out there on the market less attractive because they weren't paying what the newer bonds were going to pay, so their market value fell. Well, you could have been in what you thought was a conservative position and been down twenty plus percent.

Speaker 1 4:12

I guess the lesson here too would be uh the folks that retired in 2022 and they had these target date funds being like a target date 2022 would be the target date is the date you retire. Basically go from growth to distribution phase when you're checking out, and as you get closer to retirement, you dial back that risk because you can afford to within the you know, that's the red zone basically. You can't fumble the ball. That's the whole idea behind it. They came out just like a marketing thing years ago and it works. It's better than nothing, as they say. One thing we ran into just a couple days ago, uh, a couple came in and they've been doing business with us for quite a while. Uh she was working and uh she was with the hospital system and she had her 403B, again, deferred retirement account. And it did well last year. We did a risk analysis on it. And uh first off, I said, Why are you looking at this now? And she goes, I don't know what I have. I know it did well last year, but I'm kind of scared. We ran an analysis on it, and she was susceptible to a 40 percent downside swing, and she had about $500,000 in there, so our risk could be $200,000 in a downturn. What do you think of that, Charles?

Speaker 5:18

Well, I'm just gonna entering retirement. I'm just so surprised uh to hear that because uh it's marketed in a way that makes you think that it will become less risky as you get closer. Well, George, what happens with these funds when you retire if you still have funds in those accounts?

Speaker 1 5:35

Well, you have the ability to roll that out. What we mean by roll being you can go ahead and move it to an IRA without a taxable consequence. So just think of a rolling it down the hill, you're just moving it over to something. It's still that 401k, or in her case a 403B, it's just a different IRS tax code. It's just simply tax deferred until you do what? You start taking money out. Right, that's it. And again, you want to look at that as well. It just gives you more opportunities, folks, when you're looking at uh this phase of your retirement. Super important one if you're entering retirement, getting close. I say if the horizon would be what do you think, two to three years? Yeah. Really have an analysis done on your portfolio, again, your retirement account, and see if it's in line with what you're trying to do. And going back to 2022, can you imagine retiring folks and your portfolio drops, like I said earlier, thirty percent. Twenty thirty percent, and you need to take start taking money out of that? You're selling at a huge discount. You know, you need a a thousand to do that, and it's gonna cost you thirteen hundred, if you will, something like that nature. How quickly do you think you could start drawing down spending through your retirement account?

Speaker 2 6:41

We just brought on this couple a couple weeks ago, and she's fifty-eight and he is fifty-nine, and they want to retire in the next couple of years, and he's been with four or five different companies. He's been in retail and uh just has these 401ks that he's just left behind. Oh, and and he just said, Hey, I know I'm not 59 and a half yet. I'm still you know a few months from that, so you can't do anything with my current one, and my wife is too young. But uh, you know, I've got these other 401ks, and I'm kind of limited to the options in there with these target date funds and just very generic stuff. You know, could you put together a proposal for us? This is after we, you know, went through the steps of understanding what kind of income you know they want to have in retirement, where they are today, built a projection out for them, talked a little bit about some tax planning opportunities. He's like, could you put together a quick proposal if I were to move over all of my other funds to you so that we could go ahead and start working together and get on the path to where we want to be. So, you know, I put together a proposal that is gonna give them some downside protection using some of those buffered instruments. We're also gonna use a dividend and growth model that, you know, even in down markets, we would expect those dividends to continue. So that kind of gives them some of that downside buffer. Basically, what we were able to do is take these funds that they do have access to and go ahead and start implementing some of these strategies so that, yeah, they're a few years away maybe from retirement, but so that they can kind of coast into it. And they feel good about it because the 401ks, they don't offer all of these different options. Well, we're gonna let that be their more aggressive money. And if their 401ks are down 20% in the year that they want to retire, they're still gonna be able to retire because a good bit of their money is already gonna be with us and it's gonna have a lot of that downside protection implemented and an income plan put together.

Speaker 1 8:36

I hope this resonates with folks out there too. Again, sometimes it can get a little complicated, you kind of just do the uh paralysis by analysis. You just kind of go, I don't know where to start with this, which is very common because this is not your world. This is what we do for a living. You do something else, and again, you you don't want me in the operating room. So we have a group, you know, a lot of doctors coming in there. I don't want to follow this. Well, good, that means you you're you have a good balance out there. They have a grip on their money, but what's next?

Speaker 2 9:03

Well, nobody knows. But Kramer doesn't know. No. Guy on TV? No, Kramer definitely doesn't. He's wrong 51% of the time. 51%. Yeah. You know, people come in and they'll say, you know, I I've just done a great job with my 401k. They've been contributing plus it being raised. Right. I I didn't think about that. But yeah.

Speaker 1 9:22

What that means is like basically it's grown, but also you put maybe we had clients this week, two of them, I'm sorry to cut you off, but really interestingly, they're putting 10% in of their own money, and one has a 7% match. That's 17% a year of their going to this cat. Isn't that awesome? No, that's get you there quick.

Speaker 2 9:38

Sorry about that. I just thought I'd share that. Well, this gentleman in particular, I said, Well, what'd you do in 22? And he just went, ooh. And I said I said, let's go back to the and I wasn't trying to make him feel bad, but I thought it was important because I was complimenting him on how he's done the last couple years. But I just said, if you're looking to retire here in a couple of years, you can't afford to have another 22. Let's talk about why. And he's like, Well, yeah, I mean, I'm only up about eight percent from where I was at the beginning of 22. That really changed, you know.

Speaker 1 10:09

You know what he is, Cheryl? You know what Zach is?

Speaker 2 10:11

What's that?

Speaker 1 10:12

Remember setting it live they had the 50th anniversary? Yes. The Debbie Downer. Wah wah. What do you do in? I had a really good deal. What do you do in 22? Wah wah wah.

Speaker 10:22

But that's an important conversation.

Speaker 2 10:24

Well, I just I just don't want him to go through another 22. Yeah. We're we're primed right now. We're ready. Yeah.

Speaker 1 10:31

It's uh you could expect the unexpected, that's for sure.

Speaker 10:34

Well, you know, guys, we're talking about 401ks, and you brought up something interesting a moment ago, and that is that people have multiple 401ks very often because a lot of us have changed jobs frequently over our careers. It used to be that everybody would work at the same job forever, and then you'd get a big retirement party, and that still happens sometimes, but it also happens that you have a 401k that you've left somewhere. That's important not to forget that you have that 401k.

Speaker 2 11:05

We see that all the time. Two stories. We had a guy one time, he forgot about a 401k. It was like 40 grand. And then you had one uh couple that George has been working with for like 10 or 12 years. He's like, I think there's still some money in there. A few years after he retired, and what do you have, like 30 or 40 grand or millions of things?

Speaker 1 11:21

No, it was like it was like $120,000. It grows it's like a and he comes in with his head, he goes, George, I got I'm kind of embarrassed.

Speaker 2 11:29

I wouldn't be, I want to find a lost 401k somewhere.

Speaker 1 11:31

No, he's got a great sense of humor, got a great relationship with him. You shouldn't be embarrassed. He's just no, he's kind of funny. He's just got he's got a had that smirk on his face. He goes, uh but I forgot I forgot I had this account. There's like $130,000 to it. Isn't it a great problem to have, Cheryl?

Speaker 11:45

It sure is. I wonder if I have one somewhere.

Speaker 1 11:49

Yeah. Uh the the point would be just kind of wrapping up with the target date funds, it's better than nothing. Uh, but remember, you're your own investor, and and you know, you're you're the one doing the investing. So it's up to you by default. Uh, yes, your custody of your 401k, the company is the fiduciary, but the investment strategy is on you. And as a fiduciary, they're just giving you the options. It's simply up to you to have to decide where to invest. And the default, again, you're retiring in uh several years, it might be target date 2030. Understand what that will do in a down market. We urge you, this is not the time to get slack. What happens, as I've been doing this such a long time, is uh you have a tendency to rest on your laurels at 22 when that market flopped, and uh it it comes back, right? Invariably, we all know that. We do, but your retirement is different. You're if you're in retirement a couple years in, or you're approaching retirement, let's say you're age sixty and you retire sixty-five, it is paramount. Paramount, you go ahead and get an analysis done in this and see if if it aligns with what you want to do. Do the math in your head. You have $500,000 in your retirement account, you do an analysis of software out there that we utilize, third party. We're not here to bash anything, simply to show you that if again 2008 was to happen or 2022 was less significant, but major, and you're entering retirement, and the first thing you want to do is you and your bride, you want to go travel, uh, you want to take your grandkids to Disney or something, you want to access your money to start enjoying it. That's why you say, folks. And watching that market drop, and it's gonna be that Murphy's Law, right? It's that Murphy's Law is like we have figures it happened to me. What are you going to do? How is this gonna play out? And the worst thing in the world is not being able to enjoy your first year of retirement because figures want, want, want Debbie Downer, the market treats you with disrespect and say, Well, I'm gonna come back 20, 30 percent. You're gonna have to wait it out.

unknown 13:45

Not good.

Speaker 13:46

So if you would like for George and Zach and the and the team at North Star to take a look and do a portfolio review for you, you can call 864-671-4717. And if you've saved 500,000 or more for retirement, you can receive a complimentary North Star retirement roadmap. And they'll sit down with you and go over everything and remind you to look for those 401ks you may have left behind. The number is 864-671-4717. Or contact us at Northstar65.com. Advisory services offered through Delta Investment Management LLC, an SEC registered investment advisor. Investing involves risk, including risk of loss. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products. They do not refer in any way to securities or investment advisory products. Fixed insurance and annuity product guarantees are subject to the claims paying ability of the issuing company and are not offered through Delta Investment Management LLC.