Age-based funding is generally good for university savings plans, but not for retirement savings. Retirement savings are more complicated than university savings due to changes in retirement length, health and financial situation. More than age-based funds, especially as savings increase.
Q. Dan, we are our first child in the fall, the cutest boy I’ve ever seen, and we have a 529 savings plan for university. They have “age-based” funds available. That sounds simple, but are we missing something? – Katie of Indian Antique
A. Congratulations to Katie for her son for starting to plan university early and for her birth. In general, an age-based approach is a good approach for university accounts, but I am not a huge fan of them to save the lives of people who are retired or nearby.
In age-based funds, the percentage of assets invested in stocks depends on the age of the child. The shares of newborns like your son will be higher. As your son gets older, the percentage allocated to more stable assets increases and the percentage of stocks decreases. Assuming there is a heavy sloping temperament of inventory early on, this dynamic works well in university savings plans, as time frames are well defined.
Most children start college when they are 18 years old. An 18-year-old is a great time frame to invest heavily in stocks. In contrast, when he is a senior in high school, his time frame is short and he is a mismatch in the stock-heavy investment mix. So most age-based programs will remove him completely from stock before university tuition begins.
Details: I’m about to retire: 401(k) and how do I handle the minimum distribution I need?
For one savings in or near retirement, age-based approaches are often less suitable. With one age, the risk should be less, but it seems intuitive that more variables need to be involved. All newborns have the same basic time goals in college. You will need money for several years from the date that was easily identified. That’s not the case for retirement.
Mick Jagger may still be performing in the ’80s, but according to a survey published by the Employee Benefits Institute in 2024, 70% of people will retire by the age of 65. Need to care for a family member who is in poor health or poor health.
Life is full of twists and turns. None of us really know how long retirement will last. Will you be 90, 100, or 66? There are approximately 20 million people in the United States between the ages of 65 and 69. They all may require financial support, different pensions (if any), different social security benefits, different types of accounts, different temperament, different health profiles, countless other differences. I have it. However, an age-based approach assumes that the same portfolio applies to all of them.
Another problem I have with an age-based approach and its cousin, target date funds (common to retirement accounts) stems from how I build the funds. They are funds for funds, meaning the target date fund itself owns a variety of funds. While this is a great way to gain wider diversity, the financial institutions that run funds usually use their own fund products and some of their component funds exclusively, stinking.
Often, withdrawing new deposits allows mutual fund companies with performance funds that are more profitable for fund companies to pack weak funds into target dating funds that are receiving deposits. This is less important when savings are small, but over time, more customized approaches can lead to better results.
Dan Moisand, CFP® has been featured as one of America’s top independent financial planners by at least 10 financial planning publications and practices in one of America’s most decorated independent companies. Masu. For more information, please email atdan@moisandfitzgerald.com, visit moisandfitzgerald.com, or call Dan at 321-253-5400 ext 101.
