Target date funds for retirement

- Alan Lavine and Gail Liberman

The funds automatically invest your pension contributions in stock and bond mutual funds, based on your age and time frame to retirement.

With a 401 (k) pension you can invest your wages and get a tax deduction for the contributions. In addition, many companies make matching contributions. More employers also are starting to let you invest in a Roth 401 (k). With these programs, you get no tax deduction for contributions, but may withraw when you retire income tax free.

In the past, workers were required to do their own investing. However, too many made big mistakes. They who invested too heavily in stocks lost their shirts during the 2000 to 2002 bear market when stocks declined about 45 percent. Particularly, hard hit were workers nearing retirement.

On the flip side, others invest too much in bonds and cash. As a result, over the long term, their nest eggs didn't grow large enough to provide the money they need during retirement.

Fortunately, the Pension Protection Act of 2006 changes things for retirement savers. New workers at a company may be automatically enrolled in the companies 401 (k) pension plan. The contribution may go into a target-date mutual fund.Here is why a target date fund can be a great way to save for retirement.

Stocks are riskier than bonds. And bonds are riskier than cash investments, like money market funds.

Younger workers should have more invested in stock funds. Historically, the stock market has grown at about an 11 percent annual rate since 1926, according to Ibbotson Associates, Chicago. But you can lose money in stocks in one of every three years. So you need more time to make back your losses.

Older works nearing retirement, on the other hand, should have less in stocks and more in bonds and cash. Bonds have historically returned about 5 percent. But periods of losses are minimal compared with stocks. Meanwhile, cash investments have historically return 3.5 percent annually with no losses. Automatic target date funds change your stock and bond mix based on your age. It's a simple way to invest for retirement.

Beware that not all target date funds apportion your money in the same investments. Some might put more in stocks than others, for example. Also, you need to be careful to consider your other assets when you invest. If you already have a lot in stocks, you may not want to invest quite so aggressively for your retirement and vice versa.

As a rule of thumb, people in their 50s should have about 50 percent in stocks and 40 percent in bonds. Those ages 60 should have about 40 percent in stocks and 60 percent in bonds. At the retirement age of 65, the mix should be about 35 percent stocks and 65 percent bonds.

On the stock side, consider investing in an international stock fund as well as large company, medium company and small company stock funds. On the bond side, consider an intermediate-term bond fund with bonds that mature in 10 years or less. Cash investments might go into a money market fund or bank account.

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Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.