Dollars and Jens
Monday, June 21, 2004
Freedom Funds
I've been told that Principal is planning to launch a new set of funds of funds to allow 401k users to choose a single fund for their retirements. I assume this is similar to Fidelity's "Freedom Funds", where one tells them at what date you plan to retire, and they funnel you into the appropriate fund. The "Freedom 2030 fund", for example, contains mostly equities, but by 2029, it'll be mostly fixed-income.

I don't think retirement planning can be reduced to a single variable, though. Instead, it requires two. Other than how far you are from retirement, I think your asset allocation should take into account how much you have relative to how much you'll need. If you have 15 years until retirement, figure you need $500,000, and you have $400,000, you may want to stick the vast majority into bonds (preferably inflation-protected) and guarantee that you'll meet your target. On the other hand, if the same fifty-year-old gagged on the idea of a six-figure retirement account, you'll need to take some prudent risks in the stock market. You might also consider whether you can work beyond age 65.

A certified financial planner will suggest that two variables won't cut it -- you might want to consider, for example, whether you'll be doing anything between now and then, such as add more money, or fund a kid's education -- but two variables strikes me as a lot closer to adequate than one does.

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