Senior citizen in a Gen-X fund

NEW YORK (Money) -- Question: I'm 74 years old and currently have my IRA invested in a 2040 target-retirement fund. I want more income, however, so I'm thinking of switching to a growth and income fund. What do you think? -Yolanda R., San Diego, Calif.

Answer: I don't know how much of your overall retirement savings are tied up in this 2040 target-retirement fund you own. But if it's a significant amount, then I can't help but wonder what in the world you (or your adviser) were thinking when you bought that fund.

Don't get me wrong. I'm all for target funds. I think they're a great solution for people who want a no-muss no-fuss way to invest their money before and during retirement. These funds are diversified portfolios within themselves. So you don't have to agonize about how much of your money to put in stocks or bonds (or what kinds of stocks or bonds).

The fund gives you a ready-to-go portfolio in one package, plus that portfolio gradually becomes more conservative by shifting more assets toward bonds as you age. (For more on how target funds work, click here.)

But all these benefits depend on you picking the right target fund as a starting point. Target funds make that pretty easy by attaching dates to the funds. Essentially, you pick a fund with a date that roughly corresponds to the date you'll retire.

So if you're 20 years old and won't retire for another 40 or more years, you would pick a 2050 retirement fund. Such a fund would likely have 90 percent or so of its assets invested in stocks of various types and styles (large, small, growth, value, domestic and foreign) and 10 percent or so in various types of bonds.

The idea is that a young person needs lots of stocks for long-term growth potential and doesn't have to worry so much about the short-term gyrations a stock-heavy portfolio will experience.

If you're 50, however, you might choose a 2020 fund, which would likely hold somewhere between 70 percent and 80 percent of its assets in stocks. At this age, you still want growth, but you want a little more protection against market setbacks.

But somehow, you, a 74-year-old, have ended up in a 2040 fund, which is designed for people in their 30s. So it probably holds upwards of 85 percent to 90 percent or so of its assets in stocks.

If you're already pretty much retired and living off the money in this fund, I suspect that this stocks-bonds mix is a bit racier than you want or need. At this age of your life, the last thing you want is to see your portfolio take a swan dive because of a market meltdown.

Oh, I suppose there are exceptions when a 74-year-old might not mind having such an aggressive portfolio. If you've got so much money that a market setback wouldn't faze you, then you can afford to invest more aggressively. Similarly, if you didn't need this money for living expenses and were planning to pass it on to heirs, then you could also invest with more of an eye toward long-term growth.

But the fact that you're looking for income from your fund suggests to me that you don't fall into these exceptions. Which means you shouldn't be in a 2040 fund.

That said, I'm not sure that switching to a growth and income fund is the right move either. Growth and income really isn't a very well defined category. Some growth and income funds are very tame; others can be fairly aggressive.

You have to look into each one to get a better sense of how the manager invests, and it's possible the manager's style might change. Frankly, I don't think it's worth the work.

So what I recommend is that you stick to the target-fund category, but find a fund with a stocks-bond mix that's more appropriate for your age and risk tolerance.

By doing this, you'll get a more broadly diversified portfolio than you would by moving to a growth and income fund. Plus you'll have a stocks-bonds mix that's designed to get you through a long retirement (assuming, of course, that you don't withdraw so much from the fund each year that you deplete the assets too soon).

At this point, your best choice is probably going with a target-retirement fund that's designed for people who've already retired. These target funds typically don't have a date in their name.

Although they're listed in the lineup of target funds with dates, they're usually called something like the Income Fund or the Retirement income fund. Depending on which fund family's retirement income target fund you buy, the percentage of assets in stocks can range from roughly 20 percent to 40 percent.

Unlike the target-retirement funds designed for investors still planning for retirement, the stocks-bonds mix in the retirement income funds stays pretty much the same. They're done morphing; they're as conservative as they're going to get.

As for which fund family's retirement income target fund you might buy, we at Money Magazine have included the target funds of both T. Rowe Price and Vanguard on the Money 70, our elite list of recommended funds. That's not to say other fund families' target funds won't work for you.

But we liked T. Rowe's and Vanguard's funds because they charge very reasonable fees, and because we think the stocks-bonds mix in their funds make sense for investors who want their money to last throughout retirement.

The Vanguard fund keeps about 30 percent of its assets stashed in stocks. That should be enough to give someone your age a decent amount of growth, but also provide some principal protection. The fact that some 70 percent of the portfolio's assets are in bonds and cash means the fund should also produce a good level of income.

The T. Rowe Price retirement income target fund, on the other hand, takes a slightly more aggressive stance, keeping about 40 percent of its assets in stocks. It has more growth potential, but it will also likely be a bit more volatile than the Vanguard fund, although with 60 percent of its assets in bonds and cash, it's not as if we're talking a banzai approach here. (And this fund isn't anywhere near as volatile as the 2040 fund you're currently in.)

I think either of these funds would work just fine for you. It's really more a matter of personal choice. If you're really concerned about security of principal, go with the Vanguard fund. If you're willing to tolerate a little bounciness in the value of your portfolio in return for a shot at higher returns (and possibly more income in the future), then go with the T. Rowe fund.

One final note: Target funds work best when you have all or nearly all of our retirement assets in such a fund. If you also own other funds or have other investments, you'll want to make sure that the stocks-bonds mix for your entire portfolio doesn't stray too far from the target fund's mix. You can figure out the asset allocation of your retirement portfolio overall by going to Portfolio X-Ray tool in the Investment Planning Tools section on T. Rowe Price's site. (You must register to use the tool, but there's no charge.)

So check out the target retirement income funds I mentioned and then make your switch. The next time the stock market takes a nosedive - like it did Tuesday, dropping 416.02 points - you'll be glad you did.

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