Why Target Date Funds May Miss the Mark

Why Target Date Funds May Miss the Mark

Is your 401(k) allocated to help achieve your retirement goals?

Most 401(k) and other retirement plans now offer Target Date Funds (TDFs), which are intended to align investment risk with your anticipated retirement date.  They have become increasingly popular for a few good reasons but are rarely the best solution once your accounts achieve some size.  

Let’s look at how they work and whether they are the most efficient choice for you.

TDFs are a great choice for beginners, or when you join a new employer plan. There is typically a lineup of 10 or more funds in a plan targeting every five years for the next 30 or 40 years. Often, they are funds run by the plan sponsor and are an envelope “funds of funds”.  So, this diversifies each payroll contribution to maybe a dozen funds selected to complement each other.  The main difference between choices is the percentage of stock funds vs. bond funds, as they all get increasingly conservative as their target date approaches.

Newer plans may even automatically enroll new employees. This helps both the employee and the plan sponsor.  Most companies match half of the first 6% of salary you defer into their 401(k), providing extra retirement savings and reducing fees by growing the total plan balance.  So, TDFs are the default investment election for participants based on age, which is a big advantage over holding the money in cash.  

So, why are TDFs not the greatest thing since sliced bread?  

To start, all of your money is invested with one fund family, instead of getting different approaches and methodologies.  These funds are also allocated evenly across asset classes and industries instead of tactically selecting investments suited to the current economic environment.  They also evenly spread bond exposure instead of actively selecting appropriate issuer qualities and maturities.

The biggest challenge with TDFs is that you don’t want all your investments too conservative as you enter retirement!  Yes, you want to make sure that you have some conservative assets to draw on during rough patches, but you need growth because you still have a long-term timeframe for some of the money and you want your income to keep pace with inflation.

Here are a few things to consider:

  • How do you make your investment decisions?  Is it by looking at last year’s performance?
  • Do you actively rebalance your accounts? 
  • Do you compare what you own against what’s available?
  • If you have money in an old employer plan, have you thought about the advantages of an IRA?
  • Are you familiar with the concept of layering investment risks to match your goal timeframes?

You should review your 401(k) often as it will fluctuate along with the markets.

Call us to review your investment approach (404) 941-2800.

We want to help keep you retired!  How do we do that?

We want to help keep you retired! How do we do that?

Retiree spending is not consistent, from month to month or decade to decade. Early retirees usually travel more and increase spending on hobbies.  You might buy a car once every 5 years.  Healthcare spending increases as we age.  Investment performance is not consistent either! So, why would you want a portfolio strategy focused on providing consistent income or a static allocation not adapting to your changing needs?

We start by matching investments to projected cash flows.  First, we set aside enough money to supplement social security, etc. for about 30 months, depending on our economic outlook.  Taking little risk with immediate income provides comfort to spend.  The beauty is now most of your assets seek long-term returns without short-term risk.

Integras Partners uses different strategies for at least three time-horizons, optimizing market risk for each timeframe.  We also look beyond stocks, bond and mutual funds, with access to institutional-style real estate and private equity with low minimums. Plus, since we don’t charge commissions, our clients can earn very attractive current yields with a head start in recovering principal.  These investments are only sold by prospectus, so give us a call if you have questions.

If you’re interested in learning more give us a call at (404) 941-2800, or reach out to us about your situation

Read more Insights from Keith and Sidney @ Integras Insights

Should I Opt-Out or Take the Company Pension?

Should I Opt-Out or Take the Company Pension?

Long-time employees face this non-revocable and permanent choice upon retirement.  While the security of lifetime income can be comforting, several trade-offs exist.  

Do I want to rely on the company’s future financial strength?   How long will I live?  What will inflation do to my pension income over time?  What happens if I die?  Should I take a lower amount to protect my spouse?  What happens if they die?  Do I have a choice to take a lump sum and control how and when I spend the money?  

Pension distributions are limited to lifetime income options without future inflation adjustments.  Additionally, If the income beneficiaries die early, there is often no remainder.  Many companies offer a “lump-sum distribution” to effectively buy the retiree out of their pension obligation.  This amount can be transferred to a traditional IRA tax-free.

There are several advantages to taking the cash.  

Freedom to invest the money, timing and adjusting your income, and protecting your heirs.  Lump-sum buyouts are calculated using a specified interest rate, so the lump-sum payout value increases in low-rate environments; it increases the lump-sum payout value. 

Once you start a pension, you’re locked in.  From an IRA, you might take an increased amount until you start Social Security, allowing you to defer and increase your Social Security payment for both you and your spouse.  If you have a life event, you can adjust IRA distributions.  You cannot adjust a pension.  You may downsize your home, get an inheritance, or need to spend a chunk of cash on a new car or family need.  A lump sum allows flexibility a pension cannot.  Plus, when you die, there is likely an inheritance, which a pension does not offer. 

Integras Partners separates lump sum funds into different IRAs, keeping money for short-term needs conservative while allowing assets needed later to grow.  Having more time for the remainder to stay invested reduces market risks. Having control of the funds also protects your heirs.  Employing good strategies should increase both lifetime income and protect your family.  

Most importantly, a “lump-sum rollover” gives you the peace of mind to enjoy what you’ve worked so long to earn truly.

If you’re interested in learning more, give us a call at (404) 941-2800, or reach out to us about your situation.

Do You Still Have Money in a Previous Employer’s 401(k) Plan?

Do You Still Have Money in a Previous Employer’s 401(k) Plan?

Here is a summary of your four options for this money:

1. Leave the money in the old employer’s plan.  

401(k)s [and 403(b) plans for nonprofits] almost always have limited investment choices and often both investment and advisor expenses. You can access the fee disclosures, but most never do.  If your old plan is under an insurance company, those fees are likely to be higher, as employers typically don’t subsidize fees under these providers.

If you reached age 55 in your last year with the company, you’re eligible to access funds without early withdrawal penalties.  Consider leaving an amount you might need to withdraw before age 59 ½, which is the penalty-free age for IRA’s.

2. Move the balance to a current employer plan.  

This is usually not the most beneficial move, as you are likely to still have double fees and limited investment choices. However, it could enable you to take a loan from the new plan. If this is something that you want to consider, ask your employer for the details. 

3. Take a taxable distribution. 

This option may only net you about 55% after taxes and penalties.  Remember that retirement plan distributions are taxed as ordinary income, which means it is treated the same as payroll earnings for that year.  Unless you need all of it, you’re much better off moving it to an IRA, with the goals of growing it for retirement and the ability to take distributions gradually over years.

4. “Rollover” the money to an Individual Retirement Account (IRA) 

This is usually your best option. It’s not a taxable event; you’re likely to have much broader investment flexibility, and you could have lower overall fees. Like most discount brokerage firms, look for IRA account “custodians” without annual fees or trading commissions.  Plus, if you have multiple former employer plans, you can consolidate them into one or more Rollover IRAs. 

Remember, if you’re between 55 & 59 ½, to leave an amount you might use, as penalties on IRA’s are incurred prior to 59 ½.

Our next blog post further discusses the advantages of rolling the money into an IRA. Want to learn more about your options now? Reach out to us today to discuss your situation.

So, enjoy today and tomorrow, and let us do the worrying!

Contact us to discuss your situation if you’re interested in our time-horizon strategies.

Gift Mandated Retirement Distributions Tax-Free

Gift Mandated Retirement Distributions Tax-Free

Required Minimum Distributions (RMDs) take effect the year an IRA owner turns 73, so the government can start collecting taxes. This is payback for making tax-deductible retirement contributions while working. A few years ago, Congress enabled retirees to give any portion of RMDs tax-free charitably!

The Qualified Charitable Distribution option allows for gifting to recognized charities, which counts towards satisfying the RMD. This avoids income tax regardless of whether you are eligible to itemize.

For example, if you typically give $10,000 a year to your favorite charities, you’re probably paying taxes on this money first. So, it costs you $12,200 or more, including taxes. If you make gifts straight from your IRA, you keep more than $2,000 (plus any state tax) in your bank account!

The recipient must be a recognized 501(c)(3) charity (which is typical of religious, education, or community service organizations). Your IRA custodian may have a minimum amount per gift and will have their own paperwork to complete. You can gift as much or to as many charities as you wish, up to the total amount of your RMD.

This is just one of the tax management strategies we employ at Integras Partners. For ideas on how we might help you invest intelligently, nurture your communities, and enjoy financial peace, schedule a call with us!

So, enjoy today and tomorrow, and let us do the worrying!

Contact us to discuss your situation if you’re interested in our time-horizon strategies.