Category Archives: 401(k)

Target Date Strategies Over The Last Five Years

The intent of target date strategies is to provide investors with fully-diversified portfolios that evolve appropriately as investors age.  Target date funds have enjoyed enormous growth over recent years, not least because the Pension Protection Act of 2006 allows employers to direct retirement plan participants into these funds as the default investment option.  Consultancy Casey Quirk projects that target date funds will hold almost half of all assets in 401(k) plans by 2020.

Target Date Folios are an alternative to traditional target date funds, launched on the Folio Investing platform in December of 2007.  These portfolios now have more than five years of performance history.  Prior to the design of the Folios, a detailed analysis of target date funds suggested that they could be considerably improved.  The Folios were designed to provide investors with an enhanced target date solution.  In this article, I will discuss the design and performance of the Folios and target date mutual funds over this tumultuous period.  The risk and return characteristics of these funds and Folios provides insight into the effectiveness of different approaches to portfolio design and diversification.  Continue reading

Getting Help in Choosing and Managing a Portfolio

There is currently $5 Trillion invested in Individual Retirement Accounts (IRAs), $4.7 Trillion invested in self-directed retirement plans provided by employers (401(k), 457, and 403(b) plans), and $2.3 Trillion invested in traditional pension plans offered by private companies.  These numbers are stunning for a number of reasons.  First, self-directed retirement plans (IRAs, 401(k)’s, etc.) dramatically dwarf the amounts invested in traditional pensions.  This is part of a long-term trend, as employers move away from traditional pensions, but the magnitude of the shift is striking.  With the assets in IRA’s surpassing the $5 Trillion mark earlier this year, the amount of money in individual accounts is moving ahead of employer-sponsored plans.  What’s more, it is anticipated that IRA’s will continue to grow relative to employer-sponsored plans as people retire and roll their savings from their ex-employer’s plan into an IRA.  This matters because investors in IRA’s have even less help in creating and maintaining their portfolios than investors in employer-sponsored plans.  Continue reading

The Difference Between Marginal and Effective Tax Rates

Guest post by Contributing Editor, Matthew Amster-Burton, Mint.com.

Think you’re unlucky? I know a guy who’ll pay 99% of his income in taxes if the Bush-era tax cuts expire at the end of December. Continue reading

An Alternative Approach for Drawing Income from Your Portfolio

The question of how to safely generate income from a retirement portfolio is one of the most challenging in financial planning.  In the days when people had traditional pensions, their employers simply promised them a constant inflation-adjusted income for the duration of their retirements.  As we have moved away from traditional pensions and into self-directed savings plans such as 401(k)’s and IRA’s, investors and advisors must create their own customized income plans.  New research from Morningstar highlights what appears to be a better approach to creating a stable income stream from an investment portfolio. Continue reading

Sector Watch: Municipal Bonds

Municipal bonds are issued by states and municipalities and typically have tax advantages relative to other fixed income assets.  In general, income from muni bonds is tax exempt at the federal level and at the state level for investors living in the issuing state.  Municipal bonds have historically been favored by investors in high tax brackets who, of course, derive more benefit from the tax exemptions by virtue of being in the highest tax brackets. Continue reading

Do We Live in the Golden Age of Investing?

Guest post by Contributing Editor, Matthew Amster-Burton, Mint.com.

Do we live in the golden age of investing?

Moronic question, right? Of course we don’t. The S&P 500 sits at about the same level it did five years ago. Bond interest rates have never been lower, and the Fed says it’s planning to keep them that way through mid-2015.

Turn on any financial channel and you’ll find as many gloomy predictions as you care to sit through: debt-fueled implosion in Europe, the next flash crash, the shrinking dollar, a stagnant labor market, Great Depression 2.0 (or is it 3.0 by now?). Continue reading

Managing Your Portfolio’s Exposure to Interest Rates

Today, the yields on ten-year Treasury bonds are at a fifty-year low, and no period prior to the last few years reflects yields that even come close.  From 1962 to 2005, the lowest the 10-year Treasury bond yield ever got to was just below 4%, more than twice the current yield.

The chart below shows how unusual our current environment is.  The vertical axis is the yield from 10-year Treasury Bonds and the horizontal axis is time and we are looking at a period from 1962 to present.  From 1980 to today, we have seen the yield of 10-year Treasury bonds go from about 12% per year to below 2%.  The 10-year Treasury yield is considered a benchmark measure of bond yield and interest rates.  The Fed funds rate and the 10-year bond yield are very closely tied to one another.  For another illustration of how interest rates, the Fed funds rate and 10-year bond yield are related, see here. Continue reading

Saving and Investing for Retirement: Part Four

Generating Income: Part Four of Our Special Five Part Series

During their working years, investors focus on saving and investing with a goal of building wealth.  As they enter retirement, either by ceasing paid employment entirely or by scaling back paid employment, investors shift their focus to using their portfolios to provide a reliable long-term stream of income.  This transition from building wealth to income generation is the subject of a great deal of research in retirement planning.  Once investors are at or near retirement, the most significant financial challenge is using their accumulated savings to provide substantial income for their retirement years.  Continue reading

Saving and Investing for Retirement: Part Two

Figuring Out Whether You Are On Track: Part Two of Our Special Five Part Series

Fidelity just came out with a study that estimates that people will need about eight times their final salary level, assuming they work until age sixty seven, to be able to retire and subsequently to have 85% of their pre-retirement income provided from retirement savings plus social security.  Fidelity also helpfully provides estimates of what they believe people need to have acquired at different ages. Continue reading

Saving and Investing for Retirement: Part One

We Are In Trouble: Part One of Our Special Five Part Series

As the presidential election season of 2012 has gotten underway, there is a massive issue that has gotten very little attention: how Americans will sustain themselves in retirement.  In 2010, there were 40 million Americans over the age of 65.  By 2030, that number is expected to rise to 70 million, which represents 20% of the total population.  At the same time, we have moved from a workforce with traditional pensions to one in which each person chooses how much to save and how to invest that money.

Only 42% of American private-sector workers between ages 25 and 64 have any type of retirement plan in their current job. The majority of Americans (67%) who have access to a pension plan have only self-directed accounts such as 401(k)’s and similar accounts (such as 457(b) plans which cover those who work at non-profits or who are employed by the state or local government organizations).  A large number of Americans also have IRAs.  We refer to these types of retirement plans as Defined Contribution (DC) plans as opposed to Defined Benefit (DB) plans, the traditional pensions that used to be the norm. Continue reading