Don’t Fumble Your Retirement Planning

Guest blog by Lauren Tivnan, Managing Editor, Portfolioist.com.

More and more participants in 401(k) plans are using Target Date Funds according to the nonpartisan Employee Benefit Research Institute (ERBI). Here at the Portfolioist, we think this is great news. For more than a year now, we’ve been writing about the benefits of Target Date Funds (and more specifically, our line-up of Target Date Folios) along with a variety of postings on the importance of planning and saving for retirement.

The ERBI study found that… the percentage of all 401(k) plan participants using Target Date Funds increased from 25% in 2007 to 31% in 2008 and to 33% in 2009. ERBI also found that participants who allocate 100% of their account balance to Target Date Funds (which are often a default investment options in many 401(k) plans) are likely to stay in them:

  • Among only those participants who had all of their account allocated to TDFs, a very high rate (83.0%) stayed at a 100% allocation in 2009.
  • Almost 13% of those who had a total allocation to TDFs in 2007 had an allocation lower than 100% (but not zero) allocation in 2009.
  • Only 4% of participants with a 100% TDF allocation in 2007 had stopped using them by 2009.
  • Participants who stayed in a 100% TDF allocation and were between the ages of 30-49 were more likely to stick with an all-TDF investment than those younger or older.

This is all good news. Employees need to save early and often for their retirement (something that has been preached to them over and over again in every financial planning magazine and by almost every financial planner) and we’re happy to see that Target Date Fund usage is growing.

Target Date Funds: Not a Hands-Off Retirement Tool

But what really stood out to me in the results was the age range of employees who kept 100% of their allocations in Target Date Funds: the folks ages 30-49. Are they “setting and forgetting” about their retirement savings?

Now the ages of 30-49 represent one of the busiest times of a worker’s life. Let’s make some general assumptions here. At this point in their career, they’ve most likely had two or more positions (or even separate careers) are probably raising a few kids, and may also be supporting aging parents. Needless to say, there’s a lot on this demographics collective “plates” and I’m wondering if they are simply choosing Target Date Funds as a quick means to an end—one that they hope leads to a well-financed retirement (as opposed to actively managing their account).

Retirement Calculations: Don’t Drop the Ball

According to ERBI’s 2011 Retirement Confidence Survey, a majority of workers have not tried to calculate how much they will need for retirement, which means that many might just still be in the dark about how much they in fact need to save to live on in retirement.

Here’s a few scary stats  from the survey’s findings:

  • Doing the Calculation: Less than half of workers (42%) report that they and/or their spouse have tried to calculate how much money they will need to have saved by the time they retire so that they can live comfortable in retirement.
  • Guessing: Many workers simply guess at how much they will need to accumulate. Forty-two percent of workers report they guessed at the amount they need to save, including 11% of those who report having done a calculation.

Retirement Planning: Stay Off the Sidelines

Don’t get me wrong, I’m happy to see that more and more employees are investing in Target Date Plans at work. That’s great news. Whether it’s because Target Date Funds are growing in popularity among plan sponsors, or whether employees are simply too busy with “life” to actively manage their retirement, still remains to be seen.

A Target Date Fund is a great investment tool for retirement—but not one that investors should “set and forget.” Check in with it once and awhile. Make sure your allocations are still on target. Watch out for high plan fees (see, “How Much Does Your 401(k) Plan Really Cost You?”) and most importantly, do the calculations (we’ve recommended this free retirement calculator developed by T.Rowe Price in the past).

Get involved in your retirement planning now and stay involved throughout your working years. I guarantee it’ll pay off.

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4 thoughts on “Don’t Fumble Your Retirement Planning

  1. Pingback: Why You Don’t Have to Occupy Wall Street « Portfolio Investing Blog: Portfolioist

  2. Matthew

    I say figure out what you need to save, and then double it… As Dave Ramsey says, live like no one else so one day you can live like no one else.

  3. Retirement planning

    Planning for your retirement is the most important things that you can do. You want to start planning early to guarantee that once you do retire you have enough funds to last you through the rest of your life.The single biggest barrier to a successful retirement is to delay planning. More to the point while, there are a lot of investment vehicles out there which, on average, are better than the ones advisors recommend.

  4. Pingback: The Disappearing Retirement « Portfolio Investing Blog: Portfolioist

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