Q: I just hit the big 5-0, and my retirement date is now in the foreseeable future. How do you suggest I assess the performance of my 401(k) and investment accounts? Do you have any benchmark recommendations? I would like to know if I need to make changes or if I should stay the course.
Dare to Compare
MONEY QUESTIONS by Matthew Illian, CFP®
Dear Dare to Compare,
Ignoring the performance of your retirement accounts is like ignoring your fuel gauge on a long road trip. If you are not careful, your vehicle is likely to run out of gas before you arrive at your destination.
Retirement funds should be compared for both their performance and their expenses. I recommend using a Vanguard Target Retirement Fund when making these comparisons.
A Target Retirement Fund is an all-in-one solution for diversified retirement savings. Many companies charge exorbitantly for such a comprehensive solution. We like to use many Vanguard funds, which is an investor-owned company, because their fees are among the lowest in the industry.
The best part about comparing a Target Retirement Fund is that this benchmark is a real-life simple solution. These funds gradually become more conservative as you approach your retirement. Many of these Target Retirement Funds were launched in 2003 using index funds, and so you have more than eight years of data to compare. And unlike other benchmarks, you can invest real money in this account.
To find the appropriate fund, simply look for the Target Retirement Fund that matches your current age or retirement date. The Vanguard Target Retirement 2025 Fund (you can type in this ticker symbol: VTTVX) would be appropriate in your case. It is designed for those between 49 and 53 years old. This fund has averaged 4.5% over the last five years and 4.35% over the last three years.
Unless you have used a diversified index fund approach, your own portfolio has likely underperformed this benchmark. To understand why, compare both the holdings and expenses with this benchmark.
The Vanguard Target Retirement 2025 Fund has 27.34% in bonds, 21.7% in foreign stocks, and 27.3% in U.S. stocks. If your account was more aggressively invested in stocks, it likely underperformed because of the added risk. If this is the case, you may want to reconsider your asset allocation strategy. However, you can still compare your results by finding the Target Retirement Fund that best matches your stock and bond percentages. Even the best investment strategies underperform from time to time, which is why I recommend using at least a three-year performance measure.
Most underperform because their expenses are too high. This fund only charges 0.18%, and the industry average is five times this administrative fee.
If your own results have underperformed and your expenses are high, make a switch, which you can do easily in your personal investment accounts. You could switch to this Vanguard fund or even better to one of the gone-fishing portfolios we have constructed.
Switching funds in a 401(k) can be more challenging because only a limited number of choices are available. Start by researching the fees on each option. Then construct a portfolio of low-fee options that matches your age-appropriate asset allocation. If you prefer torture over this type of analysis, it may be easier to ask your plan administrator to simply add the Vanguard Target Retirement Funds to your 401(k) investment lineup.
Although benchmarking your portfolio takes a bit more time than checking your gas gauge, you only need to do it once a year. If you ignore this recommendation, consider yourself driving at your own risk.
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