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Michelle Singletary, "Big Mama used to say it's not how much money you make that matters, but how you make do with what you have"

Questions & Answers

Retirement

Question:

Do you think an 85-year-old man in good health should be dealing with a large portfolio of volatile stocks? His retirement plans are in real estate.

Answer:

If you mean his entire retirement plan is in real estate stocks, then nope that's not smart. He should be diversified. Doesn't mean at his age he shouldn't be in stocks but his portfolio needs to be balanced! Get thee to a good fee-only financial planner.

Question:

My parents will reach retirement age in about 20 years and I don't believe that their saving and retirement funds will be enough for them to maintain their current lifestyle, which is not extravagant. What is the best way for me to plan to help them out in their retirement years? A savings account? CDs or savings bonds? Or just wait and pay directly for their needs at that time? I am on track with my own retirement savings and do not yet have children.

Answer:

Don't wait. Go to www.aarp.org. The site has some great tips on talking to your parents about their retirement needs.

And look, start talking to them now and as respectful as you can say, "Mom, dad, I'm concerned about what you may have for retirement. I want you to be able to do this yourself and not count on me. So can we talk about how you may start saving for your retirement."

Then start sharing with them information about investing in mutual funds, diversified funds or target funds, which invest money according to when you may retire. Check Vanguard, T. Rowe Price and other sites for information about such funds.

It's good you are starting now. But don't be an enabler. They have plenty of time to get their act together.

Question:

I recently changed my 401(k) allocations and chose to put everything in a Life-Cycle (Target Date) fund. I thought the Life-Cycle fund was supposed to do the diversifying for me without worry. I now receive a message when I log onto my retirement account stating, "You have 1 equity fund(s). A diversified equity portfolio includes three different asset classes within your stock fund choices."

Now I'm worried I've made a mistake. Or have I? Should I go back to choosing my own funds and how they are allocated? If so, would it be wise to still include this Life-Cycle fund as part of my plan? I thought the goal of these new funds was to take the guess work out of retirement investing. But I have more questions now than before.

From washingtonpost.com:

Financial Futures: Life-Cycle Funds: Targets, Not Guarantees (Aug. 19) by Martha Hamilton.

Answer:

First here's a definition of lifecycle funds from "www.investorwords.com" an online financial glossary: "A highly diversified mutual fund designed to remain appropriate for investors in terms of risk throughout a variety of life circumstances. They can contain any mix of stocks, bonds, and cash."

Now as you see from the definition you are a little too hyper about what you did. You didn't make a "grave" mistake. Recently my colleague Martha Hamilton wrote about these funds (I've included the link). There are many pros and cons to this way of investing. Personally, I don't mind them if you are the type of person who just WILL NOT rebalance your retirement plan as you should. But critics worry investors will put money in the funds and just forget about it. The problem is the funds set a target date for retirement and hopefully if managed right you will have a good sum for retirement. But what if the mix is off or the fund has an idiot choosing the options. If you set it and forget it, you won't meet your target goal of having enough money in retirement.

So, calm down. Read up about life cycle funds. Look at the one you have and it's holdings. Is there a good mix of stocks, bonds and cash? The longer you have to retirement the more equities you might want to have. But you also want exposure to asset classes within equities (large cap, small cap, mid-cap, foreign, etc.)

If you think the fund you choose might perform well stay put. But don't just set it and forget it.

Unless otherwise noted the questions were answered by me in recent online discussions on www.washingtonpost.com.