Target Date Funds




[00:00:00] Matt: Welcome to real financial planning broadcast on WK, Excel, and available wherever you get your podcasts. I'm Matt Robinson joined as always by Mike Morton of Morton financial advice and the host of financial planning for entrepreneurs, Mike. 


[00:00:15] Mike: doing great, Matt. 


[00:00:16] Matt: It's great to see you. And we realized something I don't know, a little embarrassing maybe today, which is we've brought up. This is like you're baking a recipe and and every time, you go to this recipe, it comes up over and over again, and it says you've got to fold in. 


The batter and it's okay, you do it. You do it too. No one ever bothered to explain what the heck you been on this show? I'd say I just roughly counting. I'd say we've brought up the idea of target date funds. Easily five or six times. And I don't think we've ever done a show specifically about target date funds, which is weird because this is like a major way that people invest. 


You tell your clients about them, you get your clients into them all the time. So today's show everything you ever wanted to know in a really nice, tight, concise format about target date funds, Mike Morton, what the heck? are target date 


[00:01:14] Mike: yeah. Great. Matt. I'm glad to be talking about this because exactly right. We bring it up all the time and I get the question all the time, because now everybody has these in their returns. Plans, you've got 20 different things in your retirement plan. You've got to pick and choose what you're going to put your $10,000 into in your 401k or your 4 0 3 B and about half those choices have a year associated with them. 


It says, retirement,: 2045

[00:01:40] Matt: Yeah. People may not even realize that's a year. It may be like. What wait, so go off. 


[00:01:46] Mike: That's the return. You're going to get 2000%. 


[00:01:48] Matt: Sounds awesome. Yeah. Wait, I'm just going to pick the highest number I 


[00:01:52] Mike: That's right. Pick the biggest number of 


[00:01:54] Matt: Yeah. Why 


[00:01:54] Mike: 20, 20, 45, 20, 50, 20, 55. It's every five years, there's another choice. I'm not sure. That's so great for us , we've talked about that too, right? Matt, the number of choices being a little bit overwhelming. What is a target date fund. That's what these are they're years. All right. And they're they're be in your retirement plan. Hopefully you can also buy these outside of your retirement plan. Many people don't know that just in your brokerage or in your individual retirement account, you have these mutual funds or ETFs available that you can purchase, and they have a year associated with them. 


And that. Is ostensibly when you plan to retire. Now we could have a whole conversation around retirement because again, many of my clients it's, that seems so far in the future. I'm not? 


sure I want to retire. I just want to be financially free, but I still want to be involved and do stuff. So the whole notion of retirement is definitely changing as well, but the census targeted. 


It says 2040 target date, retirement 2040. So that's about 20 years from now and what it will be in that one purchase. So you can put in all your retirement plan money into this one target date fund. And inside of that fund is a whole mix of stocks and bonds and cash, and us and international and large and small, all the things that we talk about where you want to be really well-diversified. 


You buy it in a single fund. And that fund is managed for you over time as you're approaching retirement in what they think is the best way for you to be most successful with your retirement portfolio, as you approach and go into that retirement date. 


[00:03:39] Matt: So much to unpack here so much to unpack here. And again, it's just it just, it's mind boggling because this has become so embedded in investing. It's just a product that so many people use that we don't stop to think. Can we define what we're talking about here? So just to start at the beginning, first of all, it's like beer not being just for breakfast anymore. 


Target date funds. 


[00:04:01] Mike: Wait, you just say beer is not, just for breakfast anymore. 


[00:04:05] Matt: not, you could have it at any meal. 


[00:04:07] Mike: I'd never heard that before that. 


[00:04:08] Matt: So target date funds, aren't just for retirement. You can, for example if you're saving for college, there are options that many investment firms will give you that they'll say, Hey, when are your kids going to school? And we'll automatically readjust the balance in your portfolio around that. 


So you might encounter target date funds in all kinds of contexts. 


[00:04:29] Mike: Yeah. Yeah. That's exactly right. And these are pretty new. So let's give it a little historical perspective. These didn't exist. Say five or 10 years ago. I don't know exactly when someone came up with this idea, but it's a great innovation. I'm a big fan. One of the biggest things that happened in the investing industry was about 40 years ago, that index fund, it was famous. 


He started with Vanguard and Jack Bogle and he said, Hey, why don't we just allow investors to just invest in the entire. Just for one, by one thing and you own the entire market and no one's got to manage it. Just like tugs along buys, buys the entire market. That was great. Great for the individual investor. 


And we've talked a lot about returns and how they've been really good just from these passive index funds. Target date funds are a similar idea. It's a one-stop shop, set it and forget it. But this time, instead of just owning the entire stock market, Because that's a hundred percent in investing in companies. 


Okay. And equities and stock and companies, the target date fund has a mix of the stock and bonds and cash or what we call fixed income. So now you have both. So if you're a young investor, Say your target date fund is 40 years away. So target date 2060, it's going to be 90% invested in stocks. And why is that? 


Because as we've said, stocks for the long run should outperform bonds. You have a 40 year time horizon. Let's get a majority 90% of that invested in the stock market. If your target date fund now is closer and it's only five years away, I'm in target date 2025. So I'm just retiring in a couple of years. 


You don't want to be as aggressive. So the default in these target date funds will be more like a 60% stocks, 40% bonds. Okay. So Now we know that underneath the target date fund, if it's 40 years away, 90% stock, if we're five years away, it's only 60% stock. So everything in between is going to be a great day. 


Between those two from going from 90% down to 85% to 80%, all the way down to 60, by the time you retire. And that is, you'll see a term called your glide path. And that is what happens within the target date fund is that you'll slowly glide every five years, slowly go from that 90% equities down to that 60% into the stock market. 


By the time you retire. 


[00:06:50] Matt: Now astute listeners to this show may have heard us discuss before some of the downsides. Active management of funds. And the fact that one of the big advantages that you get with an index fund is that things just sit. You don't have a lot of active monkeying around and some of the fees and costs that go with that, and that can hurt your longterm returns when you. 


Refer within a target date fund to the fact that it is on a glide path that there's this adjustment over time. How much churn are we talking about inside the target date fund? How much active management are we talking about? Is that something that investors should be concerned about or is it very little. 


[00:07:39] Mike: it's super light. It is analogous to the index fund where it's predefined and there's an algorithm. So remember the indexes, it could be the S and P 500. The total us stock. Total international market. You can sit down and define these, write it on a piece of paper. Oh, here's the 500 companies in the S and P 500. 


So no one has to really manage that just as companies come and go each year, you make a little tweaks to it. Same thing with the target date fund, it's predetermined with the algorithms, of the glide path. You can go online and see what that's going to be, for the different years. 


And then underneath, I said, you have us. International companies, large companies, small companies. So inside these target date funds typically are in the passive index funds. So it's inside the Vanguard 2040 target date fund will be the Vanguard total us stock market, maybe 30. And there'll be the Vanguard total international stock market, maybe 15% of that, and so you can see that the target date funds are made up of these index funds underneath which themselves are made up of thousands and thousands of companies. 


[00:08:46] Matt: I'm not the expert on this show. I'm only the host, but I will say that this is definitely a case of. I fully endorse everything you're saying about target date funds. It's like people of a certain age will remember there was a commercial for the hair club for men. This was a service that helps men with receding or disappearing hairlines to restore their hair. 


And the president of the company would come on and he very earnestly looked at the cameras. And by the way, I'm not just the president, I'm also a client. And then you'd get like a before and after photo of he looked like telly Savalas and then he looked like, full head of hair. 


Actually happened to be in a target date funds for both my five to nines for my kids, for my for their college savings. Cause I'd like them to be able to go to college someday. Currently I couldn't pay for that. And also for our own retirement for me and my wife and I have to attest that super. 


You can fire it and forget it. And I love just hearing right now the reassurance that, Nope, you're, it's like an index fund. You're not paying lots of fees. You're not, having people trying to time the market for you. It's just something that's calibrated to give the right amount of risk for where you are. 


Vis-a-vis 


your target date? 


[00:10:06] Mike: here's the downside man, I don't 


want to burst your bubble. I 


[00:10:11] Matt: my bubble. No. And that's the going to have to be the end of this show. Thanks 


[00:10:15] Mike: see you next week? 


[00:10:16] Matt: All right. Burst my bubble. Go ahead. Jerk. 


[00:10:19] Mike: So we've said all the pros of this and they are great, and I'm a big fan of target date funds using them and all my clients, many of them walk in with them and I say, this is great. We'll continue to have a lot of investment in the target date fund. The problem is at a Highland. 


They are an average. So we've talked about this in the past. So they are built for the average investor and Matt, you don't look like an average investor to me. You look like a very unique butterfly, individual investor. 


[00:10:50] Matt: my gosh, what a euphemism it's like when your mother tells you you're handsome in a different kind of way. go on. Yeah. I'm a real butterfly. An investor. 


[00:11:00] Mike: Yeah. So they're built for the average investor with the average glide path, living the average career into the average retirement. So therein lies the rub that all of that is fine. As long as you. The average investor. 


and no one is because you have your own unique life with its own challenges, your own family, retirement, maybe at 65 or 55 or. 


You might want to change careers and paths, your income might be very unstable. It might go fluctuate up and down, more tied to the economy. It might not be tied to the economy at all. Everybody is so unique in their needs. So whenever I talk with clients, it's trying to really understand where we are and where you're headed and then build, align the resources portfolio being one of them. 


To accomplish those goals. So if you walked in and you're just like, yes, I am going to work at this average job until I'm 65 and then retire with the same expenses. Then the target date fund could. Pretty decent for you. The other problem with them is it that the glide path is preset predetermined, and it's not bad, but it might not be optimal for your life. 


And another words, another way of thinking about that is there's big economic cycles, big business cycles, your career, where are you in your career? That being heavily exposed to the market might be a really good idea for you. You might not want to be at that. Hey, I think I'm want to retire. Five or eight years, I might not want to be at only 60% equities. 


I might want to be higher than that. On the other hand, you might want to be lower than that. Hey, I'm really conservative. I've won the game. I don't need to invest that much anymore. We could be ultra conservative. So really understanding where you are means you can do a much better job tweaking your portfolio. 


[00:12:50] Matt: Was he, you said on this show before, if people are starting out with this, if you're just saving, if in some way you're just saving, you're doing good. , if you manage to save in some kind of. Fund or the more S stepped up sophisticated version, a target date fund. You're probably doing great, but if you really want to do awesome and you really want something. 


Optimal for you that gives you the amount of risk, volatility, and return that fits your life circumstance. You're saying that there are more particularized approaches that you can take some of the tweaks, we'll get to that in a second. We'll get to some of the tweaks you can apply. I actually, I was going to ask you a question about the advantage and the disadvantage of. 


Target date funds versus a slightly more curated experience. And I was going to word it my way, but it turns out you have a client who asked that exact question, and this is a great way for us to introduce something new that we want to do on this show starting now, which is to really open up avenues for listeners to ask questions of you. 


They can ask questions of me too, but if they want good, useful information for the financial future, they should ask my 


[00:14:04] Mike: don't address it to Matt. 


[00:14:05] Matt: Yeah. So we're going to give two options here. Two choices. You can either email, you can email to Mike. Mike, what email address should 


[00:14:13] Mike: Yeah, for this podcast, you can use? 


. 


[00:14:18] Matt: financialplanning . The other option is if you prefer to interact on social media, you might already be following the beyond politics podcast on. Facebook, you can go there. You can go through social media. Of course you could find me, or you can find Mike Morton on social media. We'll take your questions, but the two best ways are the email or on Facebook at the beyond politics, Facebook page. 


So with 


[00:14:50] Mike: Yeah. And the cool thing. Yeah. I'll just say the cool thing there is that, send us a question and we're definitely going to get back to you. We'll either have. 


it here on the podcast, your question, or I will definitely respond to you. So I respond to , all the questions that come in. So feel free to leave a comment or a question at either of those places. And we'll definitely get back to you. 


[00:15:07] Matt: And I should also say we prefer that it be about. Personal financial planning. But if you want to know what the secret to life is or what my recipe is that I had in mind that involved folding in the better, I'll give you those answers as well. We'll work with you. All right. Let's talk about an actual listener and client question. 


You had a client who asked you about the possibility of designing a five or six. ETFs to invest in versus some kind of an aggressive target date funds. So what are the advantages? First of all, just remind people what ETFs are. And second of all, what are the advantages and disadvantages of those two different options? 


[00:15:48] Mike: so an ETF, as an exchange traded fund, various very similar to a mutual fund and it's owning a basket of underlying stuff. So again, the S and P 500, it could be an index fund ETF, and you own those 500 companies. So the question is, Hey Mike, why would I use five or six different funds? 


Why wouldn't I just get the target date fund, and I really like it. And to go back to your point, Matt, if you are saving and then investing your savings, you're already winning. Congratulations. You are doing a tremendous job. You deserve a pat on the back and you will be great. All right. So this has taken it to another level where you really want to get interested in trying to be more particular for your situation or optimize for what you're trying to work on. So why would you have a basket of stocks? So I told you that the target date fund has underneath it, this same basket, five or six different things. If you go to the Vanguard 20, 40 target date fund right there on the page, it'll show you, we own, 22% of this And 15% of this and the, this is 22% of the Vanguard total. 


You a total U S index, 15% of the Vanguard international index. So they own underneath there in certain percentages, these same low cost, passive index ones. My recommendation for people that want to take it, up a level is that you can do that yourself. You could own those things yourself, and this gives you advantages one again, you can look every year at how your life is unfolding and decide to keep the same percentages rebalance to the same percent. 


Tweak it, depending on where you are and not just rely on. For the average investor that says, oh, you know your one year closer to retirement, let's take you down by, by 1%, from your stock allocation, that might not be a good time to do that might not be the right time for you to do that. 


So that puts a little bit more in your hands. Now I want to be careful. I don't want to overwhelm you and put too much in your hands and S and then you get nervous and oh, I gotta do I have to do something now, most of the time, you don't have to do anything. That's the benefit as well. So I believe personally that you will outperform. 


A target date fund. If you want to put in that little bit of extra effort and you will also feel really good about your future, but it's not for everybody. And if you're just doing the target date fund, it's a one shop set and forget it. And you're doing really well. 


[00:18:12] Matt: And it, honestly, the comparison that it brings to mind is the difference between you drive an automatic transmission in your car. Most people do that and you're going to. You're going to do fine, but if you really want that extra level of control high performance, you're going to drive a stick and that's and look, you've mentioned on the show before and we're about to be at a time that, there are even ways just within target date funds to tweak things a little bit, just to add a little bit of extra measure of control. 


You could choose a different date. If you want to assume more volatility, a little bit better return or a little bit more safety. So bottom line. It's just a great tool to use for. 


[00:18:53] Mike: Yeah, exactly. You could tweak the dates. We've mentioned that, and then also met a lot of my clients. We'll tweak, we'll hold some other assets outside of that. 70% are in that target date fund, but maybe we have a couple of their funds on the outside to get a little more exposure to emerging markets or small value, small cap value or whatever it is, again, just to tweak the overall portfolio in the right direction. 


That makes sense for you. 


[00:19:13] Matt: Excellent overview. And as always, people can check out your pod, your webpage, more than financial advice. If they need more information, Mike, thanks for running down. All of this valuable investing information. 


[00:19:25] Mike: thanks, Matt. 


Thanks for joining us on financial planning for entrepreneurs. If you like, what you heard, please subscribe to and rate the podcast on Apple iTunes, Google play Spotify, or wherever you get your podcasts. You can connect with me on linkedin or mortonfinancialadvice.com. I'd love to get your feedback. If you have a comment or question, please email me at . Until next time thanks for tuning in