Print

Email story

Comment

Email editor

New investing plan: Get it and forget it

By HELEN HUNTLEY
Published March 26, 2006

Do you want to save for retirement but have no idea where to start? Are you clueless about stocks, bonds and mutual funds? Do your eyes glaze over when you look at the list of investment options in your retirement plan?

If you answered "yes" to any of those questions, retirement target funds were designed with you in mind. Never heard of them? You can pick them out by their names, which always include a date, such as Vanguard Target Retirement 2015, T. Rowe Price Retirement 2020 Fund and Fidelity Freedom 2040 Fund.

The idea is to direct your contributions to a fund with a date close to your anticipated retirement and then forget about it. No micromanaging necessary.

The funds all have a mix of stocks and bonds and short-term reserves. As the date in the fund name approaches, the stock percentage gradually gets smaller, making the fund more conservative.

The concept is simple, which is why the funds have become wildly popular, which in turn is why mutual fund companies are rolling out more of them. Morningstar says there are now 133 of these funds.

So how do you choose among them? If you're investing through a workplace retirement plan, you may have only one company's funds available to you. That makes the choice easy.

If you're investing on your own, you can do a little or a lot of research to help you decide. The easy way is simply to opt for a fund company you trust.

If you're ambitious, look at the expenses for the funds you are considering, since expenses reduce returns. If you're even more ambitious, consider the investment approaches. Some funds rely heavily on indexing, simply capturing the market's gains, while others try to beat the market with stock picking. Some funds emphasize stocks more than others at every stage.

T. Rowe Price's funds opt for a higher stock percentage than competitors, retaining some exposure to stocks even in retirement. The reason? Inflation is a serious risk for retirees and stock investments provide the best chance of having your money last as long as you do.

Vanguard and Fidelity, which had taken a more conservative posture, apparently have come around to that way of thinking as well. Both companies recently announced they'll be putting more stocks in their portfolios and increasing their foreign stock exposure.

But chances are, if you're picking a target fund, you don't want to worry about the details. The important thing to remember is that there are no guarantees with stocks, but the dangers of not saving and investing are too great to ignore. It's vital to get started investing for retirement and target funds make it easy.

I received a Retirement Savers Credit of $400 for a contribution to a 2005 Roth IRA that I reported on my form 1040. I plan to make the contribution before April 16. The problem is that I put down I would be contributing $4,000 and now I find I need some of that money for unforeseen expenses. Can I contribute less than $4,000 for 2005, just as long as I contribute up to the amount that gave me the $400 credit? Do I need to file an amended return?

The Retirement Savers Credit is based on retirement plan contributions of up to $2,000, so anything more than that does not increase your tax credit. You should file a Form 1040X to make this correction print a copy from www.irs.gov) It will be easy since you can use your previously filed return as a guide.

For those who might not know about it, this credit is available for contributions to an IRA or a workplace retirement plan such as a 401(k) or 403(b). To claim it, your income cannot be more than $25,000 if single or $50,000 if married filing jointly. There also are other restrictions, including that you cannot be a full-time student or claimed as a dependent on another person's return. The credit varies from 10 to 50 percent of your contribution, depending on income.

--Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to hhuntley@sptimes.com to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or log onto www.sptimes.com/blogs/money where you also can see other questions and answers.

[Last modified March 26, 2006, 00:25:14]