Assess what you’ll have. Experts say that fixing the problem starts with assessing what you will have to live on in retirement — Social Security, pension, investments outside your 401(k) as well as in it, income from working in retirement, proceeds from the sale of a second home and so on.
Next, determine what your cost of living will be. What if your medical costs go up? What’s the fallback plan if money is tighter than expected?
Figure asset allocation for yourself. Your plan provider may have tools for figuring the appropriate asset mix. If not, search the internet for “asset allocation calculator” and “Monte Carlo retirement calculator” or hire a pro.
Look under the hood. Once you know what your allocation should be, look at the fund’s prospectus to see how well its allocations match your own goals.
“Target-date funds are not individualized for a person’s specific situation,” said Tony Drake, CEO at Drake & Associates and an investment advisor in Waukesha, Wisconsin. “They treat every person who will retire in a certain year as the same. However, every person is not the same. They have different income needs, lifestyles and resources in retirement. People should have an individualized income plan for retirement, and target-date funds can’t do that.”
Advisors say it can pay to look at the other fund offered in the 401(k) to develop a custom portfolio.
Plan the changes. “Depending on the tax consequences, it might make sense to fully liquidate a target retirement-date fund before retirement in order to create your own asset allocation,” Sullivan said. Others may just trim the TDF holding to buy something else, he added.
Experts recommend first looking at options within the 401(k) plan to avoid taxes and penalties. It may offer other types of funds that specialize in slices of the market that would suit your needs better. You can change the mix immediately by selling all or part of your TDF and buying something else, or do it gradually by buying something different with new contributions.
Also note that after leaving your job, you can roll the 401(k) into an IRA with no tax bill and then invest in just about anything you want, said Gabriel Pincus, president of GA Pincus Funds, based in Dallas and Chicago.
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