Why Target Date Funds Miss the Target For Railroad Retirement

Transcript:
Opportunities abound for railroaders when it comes to their 401k investment selections. Welcome everyone to the Highball Advisors railroad retirement whiteboard. My name is John McNamara of Highball Advisors and today what we want to talk about is your 401ks. How do you invest in them or give you some ideas to think about when you're making your investment selections.

So, all right, when you sign up for your 401k there's certain funds that you can invest in. There's usually about 20, between 20 and 30 different funds.And one of the things they have is the Target Date Fund. So let's briefly go over what the Target Date Fund is. Specifically for retirement investing and it's a date. Target date. So they're projecting, you want to project what's the date that you're going to retire? So it could be 2030. Let's say if you're 50 years old and it's 2020 right now, maybe in 10 years, you might retire and that way you'll look at the Target Date 2030 Fund.

So what they do is they provide a glide path for you to get to retirement. So what's this glide path all about? So early in your career, you can take a lot more risk and invest in equities and stocks, and obviously over time, we all know equities outperform bonds. However, as we just experienced in March and April, you have a lot more risk in equities. So what the glide path is trying to do, and these fund companies are trying to do is say, "Okay, you're early in your career, take a little more risk. And as you get to retirement, we'll put a little more safety so you have that nest egg because you'll have to go out and purchase some retirement income." If you're a non railroader. So you can go out and buy an annuity, or you can invest in some... Get some income from bonds, that type of thing. So that's that glide path into retirement. More risk early, work your way down the risk as you get to retirement.

So it's a simple way to invest. It's just, I'm retiring in 2030. I'll put my money in there and they'll do all the allocations. The diversification and it provides some nice diversification, a lot different equity and bond funds type things. The expenses are a little bit higher than normally doing yourself but for what they're providing it's not extravagant.

So let's just look at an example of a Target Date Fund. I took this one from Vanguard, their Target Date 2030. So, they're investing in the stock market, 41% of your portfolios there and then international equity is 27%. And the fixed income bonds, 22% and international equity, 10%. So that's a hundred percent and that's diversification. So this is what a snapshot of what a 2030 fund looks like in 2020. So as you're 10 years away from retirement.

So let's go over here to my well-designed chart. So down here you're just starting in the railroad and this is retirement down here. So early in your career, you're taking a lot more risk, because you don't mind if the market goes down because you've got 30 years, at least, for it to come back up. So if this is the Target Date Fund in the purple here, this is just a traditional target date. You're risky in the beginning and as you get towards retirement, you're taking less risks and you have that nest egg to go out and produce and go out and buy a retirement income. Annuities, like I said, bonds, that type of thing.

But what I'm talking about here is the tier two opportunity that railroaders have. So you can be more risky in the beginning, but do you really need to follow that glide path to go get retirement income in the later years? Because as we know, this is the tier two opportunity. So the more years and years that you have, if you have 25, 30 years, you're already going to be generating a significant amount of retirement income leaving you the opportunity... it's an opportunity to stay in the markets longer and as you know, the longer you're in the markets, as we've seen, the performance does better and a chance to create more wealth accumulation.

So that's just the opportunity I wanted to talk to you but when you think about that 401k investing. So I hope you've found this useful. Reach out to me if you have any questions and please subscribe to this YouTube channel so you can see more of these videos and give this video a thumbs up. And if you have any comments, please send them in. In the meantime, everyone please stay safe, stay on track and take care. So long everybody. Bye.

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