| Should I play it safe or go with a mix of stocks and bonds? What about target date retirement funds?
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| By Walter Updegrave , CNN/Money contributing columnist (CNN Money) |
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| NEW YORK (CNN/Money) - I'm 36 years old and moving $80,000 from my employer's retirement savings plan into a rollover IRA. I want to retire in 20 years, so should I play it safe with this money or invest in a mix of stocks and bonds? What do you think of those target date retirement funds? |
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| -- Kurt, Houston, Texas
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| Given your age and the fact that you want to retire early -- you'll be a youngster at 56 in 20 years -- this is no time to be playing it safe with your retirement savings.
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| The reason is that you've got to earn some pretty decent returns if you hope to accumulate a nest egg large enough to support you during a retirement that may last 30 to 40 years (maybe longer if longevity runs in your family).
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| If by "playing it safe," you're thinking of keeping your money in money-market funds, CDs, stable value accounts and the like, you're not likely to earn returns high enough to substantially boost the purchasing power your nest egg after taxes and inflation. |
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Go for a good mix |
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| So I'd say, yes, you are going to have to invest your rollover IRA in a combination of stocks and bonds. The only issues are: what combination of stocks and bonds makes sense for you and what sort of investments do you want to achieve your desired stocks-bonds mix? Let's start with the mix question. |
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| As I've said many times before, there's no single "correct" answer for what percentage of stocks and bonds any individual should hold. The ideal mix for any person depends mostly on time horizon -- the longer your money is invested, the more you generally want in stocks -- and on tolerance to risk. |
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| If watching your nest egg's value bounce up and down in response to market moves sends you to the Maalox bottle, then you probably need to dial back your stock exposure a bit.
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| But considering your age, I'd think that you should certainly be thinking along the lines of at least 60 percent in stocks and even as much as 80 percent. For more guidance on this issue, I suggest you check out the Asset Allocation wizard on our site. Just answer a couple of simple questions related to your risk tolerance and time horizon and voila! You'll get a stocks-bonds allocation you can use a starting point for creating a portfolio that makes sense for you. |
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Be diverse |
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| Once you've got an idea of how much you want to devote to stocks and bonds, the issue then is do you want to build your own portfolio by selecting a group of stock and bond funds that give you the allocation and overall diversity of asset classes you need?
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| Or would you prefer to invest in what amounts to a ready-made portfolio -- that is, one that automatically divvies up your assets?
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| If you don't mind sifting through a variety of fund choices and you're comfortable assessing different types of funds, then the DIY approach may be right for you.
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| The target retirement fund option |
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| But if you don't have the skill, the time or the inclination to do this, then I'd say a target retirement fund would be an excellent choice. Essentially, you pick a fund with a target date that corresponds to the date you plan to retire.
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| So, for example, someone planning to retire in, say, 20 years, would pick a target fund with a 2025 date (or something thereabouts). This fund would not only contain a mix of stocks and bonds appropriate for someone planning to retire in two decades, but it would shift that mix away from equities and into bonds as you age. This way, the fund would become more conservative in its investing strategy as you approached retirement.
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| There's one more caveat I should add for your particular case. As I noted above, someone planning to retire in 20 years would normally choose a fund with a target date 20 years away. But target funds generally assume that the mix reflects a stocks-bonds allocation that would be appropriate for a person who would be about 65 years old at retirement. |
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| Since you will be only 56 in 20 years, you'll probably want a target fund with a bit more growth potential in it -- that is, one with more stocks. So, in your case, you might want to choose a fund with a later target date -- say, 2035 or so -- to give you more stock exposure and give you a better shot at the higher returns you'll likely need to fatten your nest egg by the time you're ready to retire and keep it going during what you hope will be a very long retirement. |
