Retirement investing made simple

Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

Ultimate Guide to Retirement

• Getting started
• 401(k)s & company plans
• Investing
• Annuities
• IRAs
• Self-employment plans
• Pensions and benefit plans
• Social Security
• Insurance
• Estate planning
• Living in retirement
• Getting help

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NEW YORK (Money) -- Question: Since I'm getting close to retirement, I've moved my money into the target-date retirement fund offered in my company's 401(k). Do you think these funds are good investments? --Lucia Cannon, Johnson City, New York

Answer: I've long considered target-date retirement funds an excellent way for people who don't want to spend the time and effort to choose and monitor their own investments - or who lack the expertise to do so - to have a coherent investment strategy that can see them to and through retirement.

The concept behind these funds is simple: You choose a target fund with a date that roughly corresponds to the year you intend to retire - 2010, 2020, 2030 or whenever - and you get a mix of stocks and bonds designed for someone your age that gradually becomes more conservative as you get older.

As I see it, these funds deliver two big benefits: they make it easy for you to spread your money among a broad range of investments and they make it less likely that you'll sabotage your investing strategy by moving your money around in reaction to the market's gyrations.

But, as with any concept, you've got to be careful about how you put it in practice. As I noted nearly five years ago when these funds began popping up on more and more 401(k) investment rosters, you've got to understand what you're actually getting before you jump into one.

The biggest issue is that target funds don't all agree on what's an appropriate mix of stocks and bonds at different ages. As a result, funds from different companies that have the same retirement date can hold dramatically different concentrations of stock - and fare quite differently when the market takes a dive.

According to Morningstar, Oppenheimer Transition 2010 A - a fund geared toward people who will be retiring next year - holds 65% of its assets in stocks. Meanwhile, other funds designed for retirement investors of the same age, such as T. Rowe Price Retirement 2010 and Vanguard Target Retirement 2010 keep 57% and 54% of assets in equities respectively, while MFS Lifetime 2010 A has less than 30% of its assets in stocks.

Those variations mean that investors in these funds had dramatically different experiences as the markets went haywire over the past year. For the twelve months through January 9th, for example, Oppenheimer Transition 2010 was down 38.7%, compared to 24.8% for T. Rowe Price Retirement 2010, 19.6% for Vanguard Target Retirement 2010 and 13.4% for MFS Lifetime 2010 A.

Of course, with the benefit of 20/20 hindsight, it's tempting to say that retirement investors are better off in a target fund like MFS Lifetime. But I think that's a simplistic conclusion.

Fact is, there's no single "correct" percentage of stocks that someone on the verge of retirement should have in his 401(k). Clearly, the more stocks you own, the bigger the hit your portfolio will take when the market heads south. But there are many good reasons you might want to have more than 30% of your retirement portfolio in stocks, such as the need to protect the purchasing power of your retirement savings over the long term or the desire to leave a legacy to heirs.

I think the more valuable lesson to be drawn from the performance of target-date funds over the past year is that you've got to check under the hood before you invest in such a fund. Two key questions: How does the fund divvy up its assets not just among stocks and bonds, but different types of stocks and bonds? What sort of "glide path" does it have - that is, how quickly does it morph its mix toward bonds as you age and, especially, once you hit retirement age?

You can get this sort of information by examining the fund's prospectus or by calling the fund company. If you want to see how a particular target-date fund has fared in the past, you can plug its ticker symbol into Quotes box at Morningstar.com. To get a sense of how its shifting blend of assets might do in the future, you can insert various mixes of stocks and bonds into the Asset Allocator in the Tools & Calculators section at Troweprice.com.

Keep in mind that you also have to take other aspects of your finances into account when deciding which mix of stocks and bonds is appropriate for you. If you'll be going into retirement with little more than a modest 401(k) balance and Social Security, then you'll probably want to take a more conservative investing stance. But if you've managed to bankroll big bucks in your 401(k) and you have plenty of other resources to fall back on - say, a defined-benefit pension and a nice home equity cushion - then you may be able to accept the higher volatility that comes with tilting your investment mix a bit more toward stocks.

Target-date funds can make retirement investing easier and more manageable for savers. But if you decide that you're not comfortable assessing them or you simply want more guidance, then you might want to see whether your 401(k) offers other advice options such as a managed account or the opportunity to discuss your situation with an adviser. If such help isn't available, then you might consider consulting a financial planner or other adviser on your own.

Whichever route you take, however, you want to be sure you have a sense of how your investments are likely to perform in a variety of market conditions. Better to gain that insight and factor it into your investing choices ahead of time than realize after the fact that you were taking on more risk than you can handle.