Target Dated Retirement Funds - Defined

From Investopedia.com 

 

DEFINITION of 'Target-Date Fund'

A mutual fund in the hybrid category that automatically resets the asset mix of stocks, bonds and cash equivalents in its portfolio according to a selected time frame that is appropriate for a particular investor. A target-date fund is similar to a life-cycle fund except that a target-date fund is structured to address some date in the future, such as retirement. Its returns are not guaranteed, but depend on how the market performs.

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BREAKING DOWN 'Target-Date Fund'

For example, a younger worker hoping to retire in 2050 would choose a target-date 2050 fund, while an older worker hoping to retire in 2025 would choose a target-date 2025 fund. Because it has a longer time horizon, the 2050 fund would likely be weighted heavily toward stocks, with a relatively small percentage of bonds and cash equivalents, while the 2025 fund would hold relatively more bonds and cash equivalents and fewer stocks so it would be less volatile and more likely to contain the assets the investor needs to begin making withdrawals in 2025.

Target-date funds are popular with 401(k) plan investors. Instead of having to choose a number of investments to create a portfolio that will help them reach their retirement goals, investors simply choose a single fund designed to help them reach that goal. The fund’s managers then rebalance the fund’s assets each year and keep its investments on track to meet the fund holders’ goal of using that investment to begin paying for their retirement in a particular year.

While proponents cite the convenience to investors of putting their investing activities on autopilot in one fund, critics are wary of these funds' one-size-fits-all approach. They don’t take into account that one investor wanting to retire in 2050 might have a different risk tolerance than another investor wanting to retire in the same year. Also, a fund with the same target date can have varying levels of risk and investment expenses depending on which brokerage is offering it.

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Target Dated Retirement Funds are also referred to as: Retirefunds. 

Registered Retirement Savings Plans (RRSP) VS Tax Free Savings Accounts (TFSA) what to do!

RRSP (Registered Retirement Savings Plan)or TFSA (Tax Free Savings Account)

Most people who want to save for retirement will have this argument with themselves over time, and "time" it seems is really the key to determining whether or not you should contribute to your RRSP or to your TFSA in any given year.


Firstly let me point out what should be obvious to our readers now.  These are not "Savings" accounts so much as they are "Investment" accounts.  Within both vehicles you can purchase most kinds of investments from stocks to bonds, mutual funds, ETF's and real estate in the form of REIT's

Some people believe that splitting savings between these two investing vehicles is a safe bet, but in many instances they would be wrong.

One unique aspect of the Canadian RRSP (similar to a 401(k) in the U.S.) and the TFSA (similar to a Roth IRA in the U.S.) is that there is a "limit" to the contributions you can make in any given year but that limit "carries over" to the following year should you fail to contribute.

This fact alone should tell you how to best invest your money at different points in your life and career.  For instance, when one is a young adult, say in your 20's, it is common that your income is much less than it will be later in your life, say in your 40's and 50's which are usually you "maximum" income years.

Knowing this, one simplified plan is to contribute as much as you can to your TSFA in those early years when your income is low, then, depending on your personal circumstances, gradually switch to the RRSP as your income increases later in life.

Why? Because it is better to reduce your tax burden on the higher income rather than the lower income, and the accumulation of contribution room over years, allows for a much larger RRSP deposit, thereby reducing your tax burden even further. Tuned in Canadians know that reducing your tax burden is a big part of retirement saving and planning.

If you were prudent and maxed out your TFSA during your 20's and into your 30's, "and" you invested well in that account ( It is really a tax free "investment" account, not just a savings account)
then you would have a considerable amount in your TSFA to tap into to ensure you max out your RRSP at the top end of your income earning years.

Here is a good primer on this very issue courtesy of  BNN.

Is the RRSP headed for retirement?

Bull Market? Bear Market? the Jury's out....however

Search Engine Submission - AddMe


In the past week, there has been a dizzying array of "experts" on CNBC calling this the start of a bull market, calling it a "Bear bounce" in a downward trend and everything in between.

It only goes to show that "no one" can time the market, and that includes the so called experts.

However, being somewhat of a pragmatist, IE: 37% gains in two months, wars in Iraq, Afghanistan, Sri Lanka etc, Pirates off the coast of Africa, a Flu Pandemic maybe only one or two mutations away (fall 2009) coupled with some old market staples such as "sell in May and go away", I have taken some off the table, and shored up the rest (I hope).

After all, I don't have to actually experience a house fire, to buy some basic insurance. I just hope everything doesn't burn. (sorry, pessimistic this week and nervous about my portfolio).

Then again, 35+% gains ain't bad for two years, let alone two months.

What do you think?