Keeping your investments on target

Index fund charts in a newspaper

TEXT OF INTERVIEW

Scott Jagow: If your 401(k) is melting faster than a snow cone in Texas, maybe you should think about this: target-date funds.

They're the opposite of do-it-yourself investing. A professional money manager chooses investments based on your age and when you plan to retire. As you get closer to retirement, your investments get less risky automatically.

Stuart Ritter is with the firm T. Rowe Price. Stuart, based on what's been happening on Wall Street, why should people consider switching to target-date funds?

Stuart Ritter: This is a time when people who perhaps didn't have a plan are finding themselves more anxious and it's leading some people to think about selling out after the market has already gone down. One of the things you get with a retirement date fund is you get the discipline to stay invested appropriately when the market's going up and to stay invested appropriately when the market's coming down. This is about achieving that important goal of having money for retirement and the retirement date fund gives you the discipline, gives you the investment plan to help you feel like you're going to be more successful.

Jagow: Alright, let's look at this situation: people who have target-date funds and they're getting close to retirement. What kind of position are they in?

Ritter: Well, they're probably in a good position. If they've been in it for a while, when you're getting close to retirement, that retirement fund has automatically ratcheted down the amount you have in stocks and changes it as your time horizon changes.

Jagow: Forgive me Stuart, but a lot of people are questioning the entire retirement planning system in the wake of what has happened on Wall Street, so putting all of your choice here in the hands of a professional money manager sounds like a pretty risky proposition.

Ritter: Well remember, the retirement date funds are not just someone going out and choosing individual stocks. The retirement date fund is putting together a portfolio that's appropriate. It's something you can do on your own. The retirement fund, though, makes it more convenient, makes it easier. Most people have better things to do with their lives than watch the market every day and whether it's time to shift from stocks to bonds. The retirement fund takes care of all of that for you.

Jagow: Now target-date funds are obviously based on a time horizon. What if, when you set one of these things up, you lie about your age and say you're younger than you really are.

Ritter: That's going to throw off the allocation a little bit. Let me give you an extreme example: if you've got somebody who's 95 years old and "lies about their age" and says, "Well, I'm 65," they'd end up with 55 percent in stocks. For a 95-year-old, that's too much. Then you've got the opposite problem. If you've got somebody who's age 65 and says, "Well, I'm going to invest like I'm 95 years old. I'm only going to put 20 percent in stocks," well then you've got somebody who's taking on the very real risk that they won't have the growth they need over the next 30 years to keep up with the costs of food and medicine which is why the time horizon is so important and picking the fund that has a date matching when you turn age 65 is the one that gives you the right balance.

Jagow: Stuart Ritter, he's a certified financial planner at T. Rowe Price. Thanks so much for joining us.

Ritter: Thanks for having me.

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