The 2050 retirement money pot: ‘Set-and-forget’ target funds could be an easy option

More than a decade ago, investment managers in the United States invented “target-date” funds, allowing investors to invest in a fund that gives them monthly retirement income starting from a target retirement date.

While they’re not in Singapore yet, there are similar alternatives.

The concept behind target-date funds is simple.

A fund manager such as Fidelity or Vanguard has funds with target dates such as 2050 and 2055. If you’re 30 years old and want to retire in about 30 years, you could select the 2050 fund and contribute monthly for 31 years.

In 2050, you can start using the money you’ve accumulated to fund your retirement.

Target-date funds mix stocks, bonds and other investments to help you take more risks when you’re young and gradually get more conservative, as investment management firm Blackrock explains it.

The funds also help you avoid snap decisions that can affect savings, investment firm Schwab noted, such as buying when markets are rising or selling when they fall.

They seek more opportunity for growth in the early years, then place more emphasis on stability as investors get closer to retirement.  

A key advantage, investment advisory firm Motley Fool noted, is that investors who are not financially sophisticated can take a hands-off approach, as the manager’s diversification spreads their money over several mutual funds and gives peace of mind because they own a relatively conservative portfolio when they retire.

Along with investing in target-date mutual funds that may charge fees between 1 and 2 per cent of the assets annually, American investors can put their money into target-date index funds that charge as little as 0.08 per cent a year.

THE SINGAPORE ALTERNATIVE

While stand-alone target-date index funds and unit trusts are not generally available in Singapore yet, there are some similar alternatives.

Insurance company NTUC Income, for example, has an Aim Series of funds that allows individuals to invest in equities, bonds or other assets with target dates of 2025, 2035 or 2045 and use the funds they accumulate for retirement income.

As you get closer to the target date, your investments become more conservative. The funds have fees of about 1 per cent of the assets.  

Other insurance firms such as Aviva, AXA and Manulife all have guaranteed income retirement plans that allow you to set a target retirement date and receive a fixed monthly income. They may also pay you bonuses, depending on the investment returns.

AXA RetireHappy and Aviva’s My Retirement, for instance, start paying a set amount at your selected retirement age and then increase it by a fixed percentage every year so you can keep up with inflation. Manulife’s RetireReady similarly gives you a monthly income for a fixed period such as 20 years or even for your entire life, and you may receive a higher income if you become incapacitated.

Along with charging a fee for managing your funds, these insurance-related options also include premium costs for insurance. While that may be acceptable if you want insurance, the premium payments may reduce the amount you accumulate, and you may pay for insurance you don’t really need.

THE DOWNSIDE

While target funds are simple, there are also some drawbacks.

A key issue, investment adviser Dave Ramsey says, is that switching your investment mix to be more conservative won’t give your money a chance to grow as much as if you leave it in more aggressive investments.

By way of example, he compares two investors who invest US$250 (S$337) a month in unit trusts for 35 years, starting at age 30. The person who puts her money into a growth fund that earns 10 per cent will end up with nearly US$900,000, while the person who selects a target fund that becomes more conservative and receives a return of 8 per cent in the last 15 years would end up with only about US$700,000.

The timing for the transition from an aggressive portfolio to a conservative one can also vary substantially from one target-date fund to another, investment advisory firm Morningstar noted, exposing some funds to much more risk by the time their target date arrives.

And if you don’t have access to lower-fee exchange-traded funds (ETFs) or index funds, higher fees can lower the amount you accumulate.

Personal finance website Nerdwallet found that a 25-year-old with US$25,000 in a retirement account who adds US$10,000 every year and earns 7 per cent for 40 years would have about US$345,000 more — if she assembles a low-cost ETF portfolio with fees of about 0.09 per cent a year and rebalances it once a year, rather than using a target-date mutual fund with annual fees of about 1.02 per cent.

THE INVESTMENT CONUNDRUM

Putting your money into an insurance policy or unit trust with a target date can seem attractive. If you want an easy “set-and-forget” option, selecting a target-date fund and putting money in via direct deposit every month is easy.

If you’re willing to put some time into managing your retirement funds and choose ETFs or index funds, on the other hand, you could end up with lots more money.

There is no right answer on what to do, of course, and the choice will vary depending on the person. Regardless of what you choose, starting to invest early is essential.