Retirement mutual funds, also sometimes called target-date mutual funds, were designed to provide a given amount of income at some specific future date. Often, they are structured to provide immediate diversification into stocks and bonds, in order to build rapid portfolio value. Later, as the member nears retirement age, they move into a more conservative investment blend.
Recent market turmoil and aggressive legislation have made retirement mutual funds more costly, particularly since the first quarter of 2009. Fund management fees have increased sharply, in compensation for decreased participation. Still, these funds are popular amongst middle-income investors with ten to twenty remaining years before they reach retirement age.
When these investment vehicles first became popular, many company managed retirement funds chose them, for their outstanding performance and relative flexibility. However, in the last couple of years, more and more companies are moving away from them, in favor of more conservative, self-managed funds.
Typically, retirement mutual funds will invest in equity investments, as long as the projected retirement age is ten years or more away. They will usually maintain around 2/3 domestic equity, and 1/3 foreign, as the fund creates capital gains. Most often, they’ll also carry a mix of investment in bonds, which will provide income with less fluctuation in price. As interest rates increase, the funds will sometimes convert more of their investment into cash, which will pay lower rates, but will be more stable than bonds.
As retirement age nears, the fund usually begins to be managed more conservatively, moving from equity into bonds and cash. This provides the stability necessary to maintain the necessary cash flow for the retiree.
Unless one is very familiar with investment markets, it is advisable that a fund manager is utilized; at least until a minimum comfort level is reached. The retirement mutual fund can be the difference between comfort and poverty in one’s retirement, but proper fund management is critical, and should not be undertaken by amateurs.
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