The Personal Finance Podcast - The Easiest Way To Invest: Target Date Retirement Funds

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Starting point is 00:01:39 which is Target Date Retirement Funds. If you guys have any questions, make sure you hit us up on Instagram or tick at Master Money Co and follow us on Spotify, Apple Podcasts, or whatever podcast player you love listening to this podcast tune. If you want to help out the show, leave a five-star rating and review on Apple Podcasts. And if you want to watch us, we are on YouTube as well. You can check us out on YouTube where we are putting the podcast out on YouTube as well with graphs and charts and a bunch of other things so that you can see what we're talking about. So if you're more of a visual learner, that's a great place to look as well. And we have a big announcement.

Starting point is 00:02:15 because right now we finally have a date for the launch of Index Fund Pro. And Index Fund Pro is going to launch on January 2nd, 2023. Now, we've had it done for a while. We've had some delays on our website and delays on MasterMoney.com finishing up. So the site should be done at the time I'm recording this. In addition, we have Index Fund Pro finally ready. So if you want a discount on Index Fund Pro, If you're interested in getting that discount on Index Fund Pro, make sure that A, you get on the email list, the Master Money email list because that newsletter is going to give out anybody who's on that newsletter a discount.

Starting point is 00:02:55 In addition, if you want to be on the waiting list, we will have a link down below so that you can check it out and get on that waiting list as well. So we're so incredibly excited for you to check out Index Fund Pro. It's the complete guide to investing for beginners. It's us walking through it step by step. We go from the basics all the way up to advanced stuff. And in addition, talking about financial independence and how to use index funds to achieve financial independence. So there's a ton of stuff in this course.

Starting point is 00:03:21 It's over 30 different videos. There's a bunch of lessons. We're going to be adding lessons to it over the course of the years as well. So you will get access to all of those lessons. In addition to some cheat sheets and some other things that we do not release to the general public, we are going to only have that in index fund pro. Also, we are launching an investment calculator. and that investment calculator will be able to be accessed by the Index Fund Pro community first

Starting point is 00:03:44 before everybody else can access it. So if you want access to that investment calculator, we will have that there as well. So today we're going to be talking about something that we also talk about in Index Fund Pro, and we're going to be talking about Target Date Retirement Funds. And if you truly want to set it and forget it way to invest in index funds, Target date retirement funds are one of the best things that you can invest in. This may be the most simple way to invest your dollars. It's one of the most easy ways to invest your dollars. You don't need to understand a bunch of businesses and how they operate. You don't need to read financial balance sheets. You don't need to understand how to rebalance your portfolio. All you have to do is just

Starting point is 00:04:25 send your money over to these target date retirement funds. So the cool thing about this is then your focus shifts to things that truly matter, things like making sure your income is increasing so you can get more dollars in investments. So those investments, so those investments, can start to work for you so that you can retire that much faster. If you want to break free from the cubicle, focusing on your income is a major factor that you need to be doing. And not having to worry about what your investments are doing and wasting time on that is really something that is amazing for you to be able to do. And target date retirement funds help you achieve that. And the truth is simple. The truth about investing is absolutely simple. Simplicity and low costs always win.

Starting point is 00:05:07 Your investments should be boring. That's the reality that we're talking. about here is people who have really exciting investments, typically their risk is much higher and a lot of times they cannot beat the market. What you want to do is be the market because like we've always talked about, 90% of professional fund managers cannot beat the market. What do I mean by the market? The S&P 500. And their goal is always to beat the S&P 500, but 90% of the time they can't. And of the 10% that do every single year, they are not the same year in and year route. So why do we as amateur investors think that we can beat the market? You cannot beat the market. The statistics are there. It shows you that you cannot beat the market. So if you can't beat

Starting point is 00:05:46 the market, you need to become the market. And so that's what this is going to help you do. We're going to run through what target date retirement funds are. We're going to talk about some of my favorite ones that are out there. And in addition, we're going to go through the four principles on how to choose a target date retirement fund because a lot of people choose them wrong. So we're going to go through those four principles as well. So if that's something you're into, let's get into it. All right. So what are target date retirement funds? So you may see target date retirement funds a lot of times in something like your 401k or your employer sponsored plan. And typically the first time you log into that account, if you open up your 401k with your employer, which you absolutely

Starting point is 00:06:24 should always do, especially if they have a 401k match because that match is free money. So you always want to make sure you're getting that 401k match or 403B or whatever your employer offers. But typically you're going to see specific plans that have years in front of them. So for example, 2016 Target Day Retirement Fund. And what those years indicate is when are you going to retire? This would be a good fund for you to invest in based on the time horizon that you have left before you hit retirement age. Now, we're going to talk about how that is probably not the best way to pick your target

Starting point is 00:06:58 date retirement funds in a little bit here. But this is what these do. Is target date retirement funds, just try to simplify investing for people. And it's a fantastic way to simplify investing for most people. Because what they're trying to do is create an asset allocation for you so that you can have a diversified portfolio and not have to think about this stuff. You don't have to think about rebalancing your portfolio.

Starting point is 00:07:19 You don't have to think about all these other things that a lot of people think through. And what happens here is as you age, and if you're in a specific target date retirement fund, the thought process here is as you age, the risk goes down. So what they're really trying to achieve here with a target date retirement fund is having something like a three fund portfolio. Now, if you're not familiar with a three fund portfolio, we've talked about a little bit here,

Starting point is 00:07:43 and it's an index fund pro as well. But the three fund portfolio goes like this. Typically, what you have is you have a percentage of US-based stocks, you have a percentage of international stocks, and you have a percentage of bonds. Now, there are other types of target date retirement funds, but this is the most common that you're going to see, and most 401K plans are going to have these inside of their portfolio.

Starting point is 00:08:09 So why would you do this? Why would you have this mixture? Because it allows for a diversified portfolio. So, for example, a target date retirement fund may have 70% stocks and 30% bonds, whereas that 70% of stocks would be broken up into 50% of U.S. stocks, 20% international stocks and 30% in bonds. That's what a three fund portfolio could look like.

Starting point is 00:08:33 Now, a three fund portfolio can look any different way that you want it to. A lot of people traditionally, as they approach retirement age, that bond percentage goes up and their stock percentage goes down. Why is that? Because as you approach retirement age, a lot of people, their risk tolerance goes down. They don't have as long of a time horizon. So they don't want their stocks going up and down, meaning they don't want their stocks to be extremely volatile. Volatility just means your stocks are going up and down constantly.

Starting point is 00:09:01 For example, cryptocurrency is extremely volatile. It shoots up and it comes back down. Now, there's a bunch of reasons why that happens. We won't get into that here. You guys know how I feel about crypto, but there are a number of different reasons why that could happen. Stocks, for example, traditionally and historically, are much more volatile than bonds are. Bonds are like a fixed income asset, especially if you have government bonds or U.S.-based bonds. They're not going up and down like crazy like stocks could. So people who have a higher risk tolerance may be more interested in stocks because typically and historically, stocks have returned more to investors, whereas people with a lower risk tolerance may be happy not taking as high of a return, but they don't have

Starting point is 00:09:40 as bumpy of a ride to get to retirement. So this is how you kind of have to think through this and why this three fund portfolio is interesting. Now, target date retirement funds adjust these percentages based on how long you have to retire. So say, for example, you start with the Target Date Retirement Fund and you start early on in your career, maybe you're 25 and you get a specific target date retirement fund when you're 25, anticipating that you'll retire at the age of 60. Well, as the years go on, maybe at the beginning you have 90% in stocks and 10% in bonds. And then once you hit 35, you're going to be at 85% stocks and 15% bonds. And as you hit 45, Now you're going to 70% stocks and 30% bonds.

Starting point is 00:10:23 And as you hit 55, you're going 50-50. It's something like that where it's a sliding scale. The glide path is what they call it. It's something where this is exactly how it adjusts over time for you. They do this automatically for you. And this is a really nice thing to have because if you create your own three fund portfolio, you have to rebalance your portfolio at the end of the year to make sure those percentages are the same. What do I mean by that?

Starting point is 00:10:46 What I mean by that is if you have 70% stocks and 30% percent, bonds, and that's the asset allocation that you want, meaning that's the mixture of stocks and bonds that you want. If you have a 70-30 portfolio and over the course of the year, stock skyrocket, and all of a sudden, your portfolio adjusts automatically to 80% stocks and 20% bonds, the way you're supposed to do it, the way that traditionally a lot of people do it is you have to rebalance your portfolio, meaning you have to sell some stocks in order to add more to bonds. So it's back to that 70-30. Now, do you have to rebalance your portfolio? No, but if that's the asset allocation that you want, then that's something you're going to be

Starting point is 00:11:23 interested in doing. And that you have to do manually. You have to do it on your own. There are also robo advisors who will do this for you as well for a fee. Companies like wealth front, betterment, these types of companies will help you do that. Or you can invest in something like a target date retirement fund and they do this for you automatically. You don't have to think about it. You don't have to actually go and do that at the end of the year. However often you choose to rebalance your portfolio, all of this is done for you. Now, before we dive a little deeper here, I want to talk a little bit about the two different types of target date retirement funds because you know, your boy hates fees.

Starting point is 00:11:57 I absolutely hate fees more than anything in the world. And there are two different types of target date retirement funds. There's traditional version, and a lot of your 401 case probably have the traditional version in there. The traditional target date retirement funds are not the funds that I like. But these are what a lot of plans have. I like them much less because they have much higher fees. So you can look at some of them, even across the board.

Starting point is 00:12:17 I don't care if it's Vanguard funds, if it's Fadda. FDidelity funds, the traditional target date retirement funds, the fees go much higher. I mean, they're like half a percent, somewhere in that range. And I've seen some of them, 0.75% all the way up to 1%. Now, if you don't know how impactful fees can be, make sure you listen to our episode talking about this, because fees, even a 1% fee, can have a multimillion dollar impact over the course of your lifetime, depending on how much money you're investing. It will definitely, if you're investing in maxing out accounts, it will definitely have a six-figure

Starting point is 00:12:48 impact, but it also come up to a much larger number if you're not very careful on the impact of fees. Now, there's a second type of target date retirement funds, and maybe you're going to guess what I'm going to talk about here. These are called Target Date Retirement Index Funds. And why do we love index funds so much? Part of the reason why we love index funds so much is because the costs are so low. So instead of having a half a percent, these funds are like 0.08 percent. So this is something where your fees and costs go much lower and you're investing in index funds instead of mutual funds. And now, why are these fees lower in the index funds than they are in the traditional target date retirement funds? The reason is the traditional ones have to have fund managers. They have to

Starting point is 00:13:32 have a team in place hired to be doing these rebalance portfolios, picking out the stocks and bonds that you need, whereas the index funds, they just mirror the index, meaning if they are investing in the S&P 500, they're just doing exactly what the S&P 500 is doing. That's their goal. You don't need a massive team to be able to do this. You're just copycatting the index. You're just copycatting exactly what that index is doing. So it's much easier for them to manage, and they can keep their costs much lower. And typically, Target date retirement index funds have historically outperformed the traditional target date retirement funds because of the fees is a major factor, but in addition, you don't want to try to beat the market. You want to become

Starting point is 00:14:12 the market. So that is the big thing here. Now, let's dive a little deeper into why this asset allocation matters. So if you're new to asset allocation, trying to figure out what your asset allocation should be, there are four reasons why this really matters. The first one is your risk tolerance. Now, we talked about this a little bit earlier already, but if you are prone to really panicking when the market takes a dip, even though most of us, if you listen to this podcast know that when the market goes down, it's a very normal event. It's just something that you have to live through. But if you absolutely panic when that happens, then your risk tolerance is much lower than someone who understands that the market goes up, the market goes down. And when

Starting point is 00:14:49 the market's down, I'm actually buying stocks on sale. It's a really cool time to be able to buy more because I'm buying stocks on sale. But if that's not you yet, and the only way this comes about is through financial education. It comes through experience, financial education. And once you get this down and you keep your emotions out of investing, it becomes very easy over time. But at the beginning, when you're new to this stuff, obviously it's very stressful and you can panic. So you want to make sure that you have a lower risk portfolio in place

Starting point is 00:15:15 when you do this. So that is why risk comes into play because the last thing you want to do is make the wrong decision because your portfolio is going up and down. It's going crazy. It's volatile. And you want to sell right away and your emotions are fluttering up. It's keeping you up at night.

Starting point is 00:15:27 I mean, if your portfolio is keeping you up at night, then you definitely want to have a lower risk tolerance portfolio so that you don't have to worry about this stuff. The second thing is liquidity. Now, what does liquidity mean if you've never heard of this? It's the ability to actually access your money very quickly. And this is something a lot of people overlook. You want to be able to have access to your cash and your funds very quickly if an emergency

Starting point is 00:15:47 happens. So having enough liquidity in your portfolio is something that you definitely want to be able to access. This is why I invest a portion of my income into a taxable brokerage just so that I can have that liquidity available to me. So having liquidity, is very important. Volatility. So volatility, we've already talked about. That means when stocks go up and when stocks go down, this is the speed at which prices or value of investments can go up and down.

Starting point is 00:16:12 So when you're thinking about volatility, you want to make sure that if you hate it when stocks go up and down like crazy, then you're going to want more bond exposure. But if you don't mind it because you know the returns have historically been higher, then you're going to want more stock exposure. For me, I have the majority of my portfolio in stocks because I want the highest investment return I can get it. Specifically, if you're investing in something like the S&P 500, the 500 largest companies in the U.S., then you're going to be able to understand that, hey, unless the U.S. is going to collapse, we're okay here. We're going to ride this wave. We're going to go up. We're going to go down, but this is a roller coaster that we're all willing to ride. And then lastly, is your time horizon.

Starting point is 00:16:49 Your time horizon comes into play because how much time do you have left before retirement age? This matters a lot because the more time that you have, and I would argue that this is the most important factor of all of them because the more time that you have, that means you can take on more risk. So taking on more risk because you have a longer time horizon for your portfolio recover during the downtimes and something that you may want to think through. Now as you get closer to retirement age, most people de-risk their portfolios, adding bonds, adding some other things to that portfolio as well. So making sure that you kind of think through this, how much time do you have left? And still, it doesn't really matter if you're closer to retirement age and you

Starting point is 00:17:28 still understand stocks, maybe you have a really large emergency fund in place, if there is a dip, then you can take on a full stock portfolio if you want to. But traditionally, and what most financial planners will tell you is that you want to have some more bond exposure just to make sure that you are covered when that volatility comes in to play. Now, let's dive into the four principles on how to choose a target day retirement fund. All right. I remember when I needed to hire someone fast, but finding the right person quickly felt impossible. And if you've ever been there, you know how stressful this can be. That's where Indeed comes in. When it comes to hiring, Indeed is all you need. Instead of struggling to get your job post noticed, Indeed's sponsor jobs

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Starting point is 00:20:50 your family, and your dreams. Get financial advice that puts you at the center. Find your advisor at IGPrivatewealth.com. So these are the four principles that you want to follow when you're choosing a target date retirement fund. So principle number one is make sure you look at the fees. I want to make something very clear here because I don't like the traditional target date retirement fund because of those fees.

Starting point is 00:21:12 The fees are way too high in my opinion. Some people that may not bother them. But for me, I don't want those high fees. I want to make sure I am in target date retirement index funds when I'm investing here. This is the set of and forget it system. you don't have to worry about it. I think anything above a half a percent is too high, in my opinion. It takes away too much from your total return,

Starting point is 00:21:32 and I'm not interested in that because the impact of these fees is six figures, especially if you're investing as much as you possibly can. And even if you're not, if you're investing just a small portion right now, as you progress throughout life, I'm guessing that you anticipate to invest more dollars because you know how powerful it is for compound interest to start working for you. So investing more of those dollars is extremely important. So personally for me, my personal rule and your personal rule may be different, but for me,

Starting point is 00:21:58 I don't want to go over 0.3% because I want to keep those fees as low as possible because why pay those fees if you don't have to? I'm happy in index funds. I'm happy investing my dollars into those index funds and ETFs. So I'm not worried as much about going above that because I know how to rebalance my portfolio. Those are things that I'm more interested in. Now we have two episodes talking about the impact of fees. The first one is one that we did recently called the $1 million dollar decisions that you should be focusing on. Definitely check out that episode because that talks about a number of truly impactful decisions that you need to make with your money instead of focusing on saving on lattes or things like that. So make sure you check out that episode.

Starting point is 00:22:36 The second one is called the crazy impact of fees. And that one talks through fees, layered fees, all of these different things that a bunch of different companies can throw at you and how to avoid those so that you can save that six figures and invest those dollars towards your future value. All of this is about opportunity cost. Your opportunity cost is available to you by avoiding those fees and what happens when you avoid those fees? That means you can invest those dollars instead. Those dollars can start to compound for you and work for you and snowball and build up. And that is where you can make a major impact on your portfolio by avoiding those fees. There's a small number of decisions throughout the course of your life, specifically when it comes to personal finance,

Starting point is 00:23:15 that if you make the right decision on these small number of decisions, you can become so much more wealthy than someone who focuses on the wrong things. Clipping coupons, wrong thing. Focusing on investment fees, the right thing to focus on. Because clipping coupons is a $6 problem. Focusing on investment fees is a $600,000 problem. So making sure you're focusing on the right things is how you can truly make an impact. Principle number two. This is a big one and this is the biggest mistake that most people make. You do not choose a target date retirement fund based on your age. You do it based on your risk tolerance. So a lot of people will go and choose a target date retirement fund.

Starting point is 00:23:54 Say they're going to retire in 15 years. So they choose a target date retirement fund and they select the one for when they're going to retire in 15 years. Well, if you do that, you're going to have a much higher bond exposure than maybe you want. If you're just getting started investing and you really need that money to start growing, then you really want to have a different target date retirement fund,

Starting point is 00:24:14 maybe something like a 2060 or a 2065 target date retirement fund. That is where you should be more interested in because having more stocks is going to allow that money to compound and grow faster. Now, if your risk tolerance is not aligned with that, then maybe having that more bond exposure will be impactful. Now, the same is reverse. Say, for example, you're 22 years old and you're looking to pick out a target date retirement fund, but you really freak out when the market takes a dip.

Starting point is 00:24:37 You really freak out with volatility when the market goes up and down. Then you are more inclined to pick a target date retirement fund that may be an older target date retirement fund, maybe something like a 2030, 2035, 20, 25, 20, 40 target date retirement fund that's going to allow you to have more bond exposure in that mixture so your portfolio isn't going up and down. So if you're bullish on stocks long term, if you are okay with a little bit of volatility, which honestly is much less volatility than some of these other investments that people are buying. But if you're okay with a little volatility, then picking a younger target date retirement fund like a 2060, 25, something along those lines.

Starting point is 00:25:13 But if you are someone who really does not have a high risk tolerance, then picking a 2030 through 2040, somewhere in that range will be the range that you would be interested in looking at. I'm going to show you later how you can look at what each target date retirement fund has. And in Index Fund Pro, we actually talk about this and show it visually so that you can go through and see

Starting point is 00:25:32 what these funds have as well. Principle number three, never just let your company pick your fund. So what happens is a lot of times when you start a 401K plan or you start a company-sponsored plan or a Roth 401K or a 403B, whatever it is, if you don't put those

Starting point is 00:25:48 dollars to work and you don't invest those dollars, a lot of times your company will automatically invest it in the default asset. The last thing you want to do is allow your company to invest your dollars, the dollars that you are depending on to retire in whatever they want. Because sometimes that can default to something with like a 1% fee, for example. So you want to make sure that you're doing your research. Look at the funds that are available to you so that you can invest those dollars in something that actually makes an impact and follows your investing plan. So never allow your company to just default invest your money into one of their funds. Then lastly, Principle 4, which also goes in line with Principle 3, is to do your research. Now, there's a number of different ways to do

Starting point is 00:26:27 your research. First of all, say, for example, your company's 401k plan has Fidelity funds in it. So you want to go to Fidelity's website and figure out what these funds actually have inside of them. Are they index funds? Are they traditional funds? You want to look at the fees. The second place you can also go is Morningstar. Now Morningstar has fund ratings that you can look at. This is what I personally. use. I go and look at Morningstar, look at these funds, see what's actually in them. They also have the expense ratio. They talk through that stuff as well. Morningstar has a great rating system. It is one of the best out there and I absolutely love Morningstar. So if you've never been there, we'll link it up down below so you can check it out. But Morning Star is a fantastic option for folks

Starting point is 00:27:05 who are looking to dive deeper into mutual funds, index funds, all those different things and see what's actually in the portfolio. They do a great job of actually breaking all that down. So those are the four principles. Let's look at a couple sample portfolio. for different types of investors. So this is just to give you an idea, especially if you're new to this stuff, on a couple of examples of maybe what a sample portfolio would look like.

Starting point is 00:27:27 So if you're a really conservative investor, meaning you don't like the volatility of the market, you don't like it when the market goes up and down, maybe you have something like 50% stocks and 50% bonds. Now, a 50-50 portfolio may look like 30% U.S. stocks, 20% international stocks, and 50% bonds.

Starting point is 00:27:44 Maybe it's the total international bonds. You can have U.S.-based bonds, Maybe you just have a total bond market fund there. There's a number of different things that you can have available to you. But that would be a portfolio of somebody who is a very conservative investor, in my opinion. Now, you can be even more conservative and have like 70% bonds and 30% stocks. Your returns aren't going to be that great. They're not going to be as good as someone who has a larger weight in stocks.

Starting point is 00:28:06 But if you need to be conservative so you can sleep at night, more power to you. We want you still invest in your dollars so that money can start to compound. Now, what about a moderate investor? So in my book, a moderate investor would have something like 70% stocks and 30% bonds. 30% bonds are way too high for me on the bond exposure. But for some people who maybe are moderate investors, that would be perfect for them. So they don't have as much volatility in their portfolio. So maybe this would be 50% U.S.-based stocks, 20% international stocks, and then 30% bonds.

Starting point is 00:28:40 Then there's aggressive investors. If you want to be an aggressive investor, you can look at something. And I still don't even think this is that aggressive. especially if you're investing in index funds. But if you are investing in something like 90% stocks or all the way up to 100% stocks, and then you have something like 10% bonds. A lot of the younger Target Day retirement funds,

Starting point is 00:28:58 all of those funds usually have some sort of mixture just like this, 90% stocks, 10% bonds. Now, if you look at someone like Warren Buffett, who I believe is the greatest investor of all time, he puts his family's portfolio into index funds. And what does he buy? He has a portfolio of 90% at the S&P 500 index fund and 10% of the total bond market index fund.

Starting point is 00:29:18 That's how he invests his family's money. He's in his 90s and his risk tolerance is still out of 9010. So that is where it shows that truly that is one of the best portfolios out there. Like if you're just new to investing and you're trying to figure out what the heck do I do, look into potentially doing a 9010. 9010 is something that the greatest investor of all time is doing and understands that that is the best portfolio for his family. So just thinking through this and look into that, do a little more research.

Starting point is 00:29:44 search so that you can see what works best for you. So now we're going to do a little bit of analysis and look at some of my favorite target date retirement funds. All right, so by far, my favorite target date retirement funds out there are the Vanguard target date retirement funds. The reason for this is I think they have the lowest fees and they have some of the best funds in the game. Another great option would be Fidelity, but Fidelity doesn't have as many options as Vanguard does, especially when you're looking at some of the Fidelity Freedom Index funds. Those are the ones that you can look at as well, but the Vanguard Target Date Retirement Index Funds are some fantastic ones and they keep their expense ratios really low. So for someone who has a higher risk

Starting point is 00:30:23 tolerance, maybe once that 90-10 portfolio, you can look at some of these. Here's some of the tickers, for example. VLXVX is the Target Date Retirement Fund of 2065. So that is the newest one that they have out there. And when you look at these, you'll see it has this line item that says birth year, 1998 to 2003. This is just to make it easier for most people. But like I said, you do not pick your target date retirement fund based on the date you're going to retire. You do it based on your risk tolerance. So it has this thing that says years to retirement about 45 more years and the risk potential is a four. So you can open up these funds and we'll link this up down below and we walk through this on Index Fund Pro 2 visually. But you can open up these funds and you can see inside of

Starting point is 00:31:04 here that there are a number of factors that they have in play. But one cool thing that you can look at here is you can look at how the portfolio is composed. So for example, this is the youngest one out there. And so they have 54.3% in Vanguard's total stock market index fund. Okay. They have 36% in Vanguard's total international stock index fund. They have 6% in Vanguard's total bond market index fund. And they have 3% in Vanguard's total international bond index fund. So this portfolio is comprised of international stocks and international bonds and U.S.-based stocks and U.S.-based bonds. And it's broken down at about a 90-10 portfolio, meaning 90% stocks, 10% bonds. And that's typically what you're going to see, specifically within index funds. Now let's look in comparison to maybe a 2030 target date

Starting point is 00:31:56 retirement fund. So this has birth year 1963 and 1967 for people who want to retire another 10 years. But again, you do not pick your target date retirement fund based on when you're going to retire, you pick it based on your risk tolerance. So this fund, for example, is going to have a much higher bond exposure. So let's look at how much higher it actually is going to be. So this fund actually has 39% in the total stock market index fund. It has 25% in the total international stock index fund. It has 24% in the Vanguard total bond market index fund. And it has 10% in the Vanguard total international bond index fund. So this has 35% in bonds. And then the rest is going to be in stocks. So this is a much less aggressive portfolio than someone who

Starting point is 00:32:43 potentially could be with these younger funds. Now let's look at the 2020 fund because the 2020 fund are folks who should already be retired, but these funds are still available obviously to stay invested in. So if you look at something like this, there is much higher bond exposure in this than there would be in one of the newer funds. So for example, the total bond market index fund is 31%. So actually the majority is in this Vandegaard total bond market index fund. Then they have the Vanguard total stock market index fund at only 26.3%. They have the total international stock index fund at 17%, the total international bond index fund at 14, and the total short-term inflated protected securities index fund at 10%. So what this means is what's happening here

Starting point is 00:33:25 is that this has 43% stocks and 55% bonds. So you can see how this risk tolerance can shift over time as you get closer to retirement age. But if you're, your risk tolerance is higher and you're happy being in stocks, you want that Warren Buffett portfolio, then you want to pick these younger funds. In fact, picking the youngest fund is the one that's going to allow you to do that. So that's just some examples of the Vanguard funds. Fidelity has them and their Fidelity Freedom Index funds, but you want to make sure index funds are involved in there and you want to look at those fees. So looking at those fees is incredibly important. This link down below will be able to show you those fees. Like for example, I'll show you the fee

Starting point is 00:34:01 on that 2065 fund, the first one that we talked about. The expense ratio is zero. 0.08%. The investment minimum is $1,000. So this shows you how you can kind of get into some of these funds, how the fees are that much lower. Whereas if you look at just the traditional target date retirement funds, the Vanguard average one is 0.6%, which is much, much higher than 0.08%. So these are much, much higher, not something I'm interested in is paying that high of a fee. The Fidelity ones range from a half of percent all the way up to 0.75% on the traditional target date retirement funds. Before we wrap this episode up, I want to get into some of the pros and cons of Target Date Retirement Fund so that you can think through, are these best for me or do I want to

Starting point is 00:34:42 go with another strategy? All right, so here are the pros of Target Date Retirement Funds. The first one is it's the ultimate autopilot way to invest. You don't have to think about it. You just send your money over there every single month. Those dollars are invested over time. You don't have to think about your portfolio again if you don't want to. It's an all-in-one vehicle, meaning there's no need for a bunch of other assets.

Starting point is 00:35:02 You have all your assets in one place. you just buy that target date retirement fund, you set it and forget it and don't have to worry about it again. In addition, it allows you for a diversified portfolio without having to think about it. Now, some of the cons are if you get a traditional target date retirement fund, it's going to have higher expenses than just buying a traditional index funds. You want to make sure you're getting those target date retirement index funds instead.

Starting point is 00:35:24 If your 401k only has the traditional ones, personally, what I would do is get the 401k match, make sure you get that match because that's 100% return your money, that's free money, after that, I would go and open up my own accounts and I would buy low-cost index funds that way or low-cost target date retirement funds. And then the other con is that there's just little room for changing goals. So like if you want to change your goals, there's not a ton of different things that you can do. Really, you're going to have that 90-10 portfolio or as your risk tolerance

Starting point is 00:35:51 adjusts. Maybe you're going to have a 50-50 portfolio just depends on what your risk tolerance is. But there's not a lot of change involved here. It's going to be the same throughout time if you stay invested in these target date retirement funds. So that's the other downside as well. But the pros are amazing, especially if you're a type of person who doesn't want to think about their finances all the time. You don't care about this stuff. You just want to get a good enough return so that you'd be able to retire, draw down in that portfolio for the rest of your life. And Target date retirement funds are absolutely amazing. If you love your career, you want to be working through your career and making sure you're investing your dollars so those dollars are

Starting point is 00:36:23 working for you. These are a fantastic option for a lot of people, especially if you're new to personal finance as well. Listen, thank you guys so much for listening to this episode. I truly appreciate each and every one of you. I hope you learned a ton about Target Day retirement funds. Again, if you guys have any questions, hit me up on Instagram or TikTok at Master Money Co. And don't forget to follow us on Spotify, Apple Podcasts, or whatever podcast player you love listening to this podcast too. And if you want to have out the show, I can't thank you guys enough who have left those five-star rating and reviews. I read every single one of them. I truly appreciate it when you leave those. It makes my day when we get those five-star rating and reviews. So thank you so much

Starting point is 00:37:00 for leaving those. But if you get value out of the show, make sure you share. with a friend, leave a rating and review, and we will see you on the next episode. Rosen lasagna, medium power, 15 minutes. Sounds like Ojo time. Let's play. Feel the fun with Play Ojo, the online casino with all the latest slot and live casino games. What you win is yours to keep with no wagering requirements, instant payouts, and no minimum withdraws. Hey, I just won.

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The Personal Finance Podcast - The Easiest Way To Invest: Target Date Retirement Funds

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