Q&A: What to consider when investing in target date retirement funds

Dear Liz: I have 100% of my 401(k) in a fund called “Target Retirement 2030.” This fund is made of several other funds, so does that qualify as “diversified”?

Answer: It does. Target date funds have become increasingly popular in 401(k) plans because they do the heavy lifting for investors. The funds select asset allocations and grow more conservative in their mix as the retirement date approaches.

Target date funds aren’t perfect, of course. Some are too expensive. The typical target date fund charges about 1%, but Vanguard and Fidelity charge as little as 0.15%.

Another issue is the “glide path” — how quickly the funds get more conservative. There’s no consensus about what the right glide path should be, and investment companies offer a lot of different mixes. Any given glide path may be too steep for some people and too shallow for others, depending on their circumstances. As an investor, you can compensate for that by choosing funds dated later or earlier than your targeted retirement date. If the 2030 fund gets too conservative too fast for your taste, for example, you could choose the 2040 fund instead.

Despite the downsides, you’re likely to be much better off in a target date fund than you are in some of the other options. Too often novice investors take too much or too little risk without realizing it. They may have all of their money in “safe” low-return options, which means they’re losing ground to inflation. Or they may have all their money in stocks, including their own company’s stock, and would be unprepared for a downturn wiping out a good chunk of their portfolio’s value.

Even those who know they should diversify often do it wrong by randomly distributing their contributions across their investment options. If you don’t know what you’re doing, or you simply prefer investing professionals to take charge, target date funds are a good way to go.

Q&A: Life insurance for people over 65

Dear Liz: Can you give us some direction on how to get good term life insurance when you’re over 65? We had 25-year term policies and the premiums skyrocketed, so we are looking. Will getting a group plan (such as the one offered by AARP) help me? I’ve had two heart valve surgeries and knee and hip surgeries but don’t drink or smoke. We are concerned that we may not have enough saved. My wife is still working, but I have not been able to find employment since I lost my job due to a downsizing.

Answer: The options available to you are likely to be limited or expensive or both.

The life insurance program offered through AARP provides up to $100,000 in term coverage that ends at age 80 or $50,000 in permanent life insurance that can extend through your life. There’s no medical exam but you do have to provide health information.

Life insurance with higher limits may be available but you’re not going to like the price, said Delia Fernandez, a fee-only Certified Financial Planner in Los Alamitos. Life insurance after 65 is usually expensive in any case, but those heart valve surgeries could make it much more so, depending on how long ago you had them, how successful they were and what medications you’re on.

Fernandez recommends consulting with an independent life insurance agent so you can get a better idea of what’s available and what it will cost. Once you have an idea of the premiums, you’ll have to weigh whether you’d be better off investing that money instead.

As a general rule, you don’t want to be worth more dead than alive — and not just because you don’t want your spouse contemplating ways to collect. More importantly, insurance coverage that exceeds your income-generating capacity signals that you may be spending too much for insurance and need to consider alternatives.

Q&A: 30-year versus 15-year mortgage

Dear Liz: Regarding the 57-year-old woman who wanted to refinance to a 15-year mortgage, why didn’t you present the benefits of keeping the low interest and low payments available on a 30-year loan and investing the difference? In 30 years the house would be paid off, but there would also be a pot of cash available if the difference were invested in a diverse portfolio. Too many people make the emotional decision that a paid-off house is necessary in retirement, then they end up having no cash when they might need it.

Answer: You’re right that when cash is tight, keeping a mortgage can make sense. Given her teacher’s pension, other savings and desire to pay off the home faster, the 15-year loan is a reasonable option. The faster payoff schedule also means that she can turn around and tap more of the equity in the unlikely event she needs a reverse mortgage later in life.

Friday’s need-to-know money news

mortgageToday’s top story: How to know you’re mortgage pre-approval worthy. Also in the news: AmEx doubles your rewards at small businesses until the end of the year, where the savviest shoppers live, and the most common money schemes people still fall for.

How to Know You’re Mortgage Preapproval Worthy
Don’t be caught by surprise.

AmEx Doubles Rewards at Small Businesses Till End of 2016
A win-win all around.

Study Finds Where the Savviest Shoppers Live and What They’re Buying
What’s happening in your area?

The Most Common Money Schemes People Still Fall For
Don’t get duped.

Thursday’s need-to-know money news

22856641_SAToday’s top story: How new grads should handle their student loans. Also in the news: 7 in 10 people would boycott a bank that rejected them for a credit card, why medical crowdfunding campaigns are rarely successful, and how to pick the right Medicare Part D plan.

New Grads Owe New Debts in November. How to Handle Yours
Your grace period is over.

Rejected for a Credit Card? 7 in 10 Would Boycott the Bank, Survey Finds
Taking it personally.

Just 11% of Medical Crowdfunding Campaigns Are Fully Funded, Study Finds
Taking desperate measures.

5 Steps to Picking the Right Medicare Part D Plan
Working through the open enrollment maze.

Wednesday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: Staples becomes the latest employer to start paying student loans. Also in the news: Places with the highest and lowest credit scores, why you can’t always bring your cell phone to a new carrier, and the pros and cons of paying for travel over time.

Staples Jumps on Hot Employer Trend: Paying Student Loans
Better than a discount on office supplies.

Places With the Highest and Lowest Credit Scores
Where does your area rank?

Why You Can’t Always Bring Your Phone to a New Carrier
Deciphering the maze of rules.

Should You Pay for Travel Over Time?
Is the immediate gratification worth the expense?

Tuesday’s need-to-know money news

shutterstock_101159917Today’s top story: How to start married life with extra cash. Also in the news: Credit counseling for new grads, how your brain tricks you into using the wrong credit cards, and the retailers that reward you for recycling your unwanted junk.

5 Ways to Start Married Life With Extra Cash
Giving your marriage a strong financial start.

Credit Counseling for New Grads
Getting your post-college financial house in order.

3 Ways Your Brain Tricks You Into Using the Wrong Credit Cards (And What You Can Do About It)
Keeping the right cards at the top of your wallet.

The Retailers That Reward You for Recycling Your Unwanted Junk
Better for the planet and for your wallet.

Book Giveaway – The Index Card: Why Personal Finance Doesn’t Have to Be Complicated

unnamedI’m giving away a copy of “The Index Card: Why Personal Finance Doesn’t Have to Be Complicated,” written by my friend Helaine Olen of Slate.com and Harold Pollack. These two cut through the hype and clutter to tell you what you really need to know about money.

To enter to win, leave a comment here on my blog (not my Facebook page). Make sure to include your email address, which won’t show up with your comment, but I’ll be able to see it.

All comments are moderated, so it may take a little while for your comment to show up.

The winners will be chosen at random Friday night. Over the weekend, please check your email (including your spam filter). If I don’t hear from a winner by noon Pacific time on Monday, his or her prize will be forfeited and I’ll pick another winner.

Also, check back here often for other giveaways.

The deadline to enter is midnight Pacific time on Friday. So–comment away!

When Social Security Turns You Into a Zombie

If the Social Security Administration thinks you’re dead, you might wish you were.

People who accidentally wind up on the agency’s Death Master File have seen their bank accounts frozen, credit cards closed, health insurance cut off and benefit payments canceled or even pulled back from checking accounts.

One California man told me his 97-year-old mother nearly had her utilities shut off after her bank froze her account and all her checks bounced, including a birthday gift to a grandchild. A retired professor in Massachusetts wasn’t allowed to get his prescriptions filled and found that all his medical appointments had been canceled, according to a recent article in the New England Journal of Medicine. A woman in New Hampshire told CNNMoney couldn’t get her driver’s license renewed for months.

In my latest for the Associated Press, what to do when Social Security thinks you’re dead.

Monday’s need-to-know money news

wall_street_zombie_moneyToday’s top story: Frightening types of 401(k) fees. Also in the news: It’s time for open enrollment, how to avoid bringing zombie debt back from the grave, and the staggering amount of money behind all things pumpkin.

3 Frightening Types of 401(k) Fees
The dark side of retirement funds.

Nov. 1 Means It’s Time for Health Insurance Open Enrollment
Time to purchase health insurance.

1 wrong move can bring ‘zombie’ debt back from the grave

If you thought the pumpkin spice craze was a bit much, look at this number
Pumpkins are a smashing success.