One Size Does Not Fit All

Retirement planning is so complex it’s tempting to use a product that implies simplification. Target date funds are one example. But there are things in life that should be highly suited to your personal preferences, like your financial plan or your wedding dress.

Filene’s Basement’s “Running of the Brides” was a cherished Boston tradition.  Hundreds of prospective brides would cobble together a pack of trusted advisors, storm subterranean Downtown Crossing, and chase the bridal gown of long held dreams.  With deep discounts, the price was always right but the dress had to be the proper size, style, cut, train length, fabric etc, etc, etc. It was no easy feat, so teams had to be strategic with matching shirts and secret hand signals. With a great deal of effort, and maybe some trading, the bride would score a captivating dress on a parsimonious budget.

Now imagine this absurd scenario: You decided to stay in bed that Saturday morning for the “Running of the Brides” and sent a football team instead. The only instruction you give them is a size 12. On the surface, some of this makes sense. Gridiron galoots already have matching shirts and understand last second audibles. Aggressive offensive linemen can clear paths through the ruthless bridezillas so the wide receiver can snatch a dress. All this occurring while you’re in your jammies leisurely browsing china patterns. Sounds great, huh?

But I bet you wouldn’t blissfully spike the dress in the end zone. I wonder if it would actually be a dress and not some burlap sack. Then, despite your somber disappointment, you‘re confronted with a Mount Rushmore face head coach insisting “we’re on to photographer selection.”   But remember the guys did their job.  When you give generic instructions, expect generic results.

This is exactly the same logic employed by investors purchasing target date funds. If you purchase shares of “Retirement 2030” funds you forgo the opportunity to plan based on your personal situation and preferences. While the funds are managed somewhat aggressively in earlier years, their investments get more conservative as it gets closer to the target date. All decisions are based solely on that date. Your life expectancy, estate planning needs, retirement travel plans and other assets are not taken into account. There is no financial planning; you’re simply lumped in with the rest of the fund shareholders. Maybe even with a few of those bridezillas and galoots.

If that is not bad enough, target funds present another obstacle to a happily ever after retirement. A widely held criticism of target funds is the investment becomes too conservative once the date is reached. Remember, a 20-30 year retirement is very common. If you do not earn at high enough returns and keep up with inflation you increase your chances of running out of money. It is important to holistically consider your personal situation and plan from there. It is impossible for target funds to do so.

For many, the perceived drudgery of actually sitting with an advisor and crafting a personalized plan seems intimidating. But you’re as special as the bride to a quality advisor and it does not take much time.  A long retirement should be something that is anticipated, not feared. It is quite possible you’ll renew your wedding vows or meet a second Prince Charming at age 80. The Wicked Smart Investor wants you to have the budget for another nice dress.