Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire On Time, which you can grab today on Amazon or by going to www.howtoretireontime.com. My name is Mike Decker. I'm the author of the book, How to Retire On Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to discussing financial topics, we can cover it all. Now that said, please remember this is just a show.

Everything you hear should be considered informational, as in not financial advice. If you want personalized financial advice, then request your wealth analysis today from my team by going to www.yourwealthanalysis.com. With me in the studio today is David Transon. David, thanks for being here.

Yes. Glad to be here.

David's job is gonna be reading your questions, and I'm going to do my best to answer them. You can submit your questions in by either texting them to (913) 363-1234. That's (913) 363-1234, or you can email them to heyMike@howtoretireontime.com. Let's begin. Hey,

Hey Mike, Should target date funds be a part of my portfolio?

That's a great question. Yeah. Appreciate the question, because for all those who don't know what a target date fund is, the idea, and there's a lot of variation here, is that instead of trying to put together a carefully crafted portfolio, you can just kind of buy one mutual fund or one ETF or whatever, typically it's a mutual fund. Yeah. And the fund is going to manage your portfolio as you approach retirement.

So basically, the closer you get to retirement, the less risk you're taking. So if it's a target date fund, and let's say it's thirty years from now, you might be very heavy in equities or stocks, which have more growth potential, traditionally speaking.

Makes sense.

And then as you get older, let's say you're now twenty years away or ten years away, they're slowly shifting more towards bonds, or bond funds within this target date fund. And it's just kind of a simple way to invest towards retirement.

Okay.

And simple is wonderful.

Yeah.

But oversimplified can be a problem. And so in my mind, it's kind of like a nice benchmark or a nice cliche, but you've gotta ask yourself, is this right for you and your specific situation? So for example, if you plan to retire, and you're gonna live off of Social Security pension, a target date fund might not make any sense in the world. If you have legacy intentions, all of your assets in a target date fund might not make all the sense in the world. Now you might ask, well, why is that?

Mhmm. The target date fund's intended to kind of bridge the gap towards when you retire, and then you kind of have this conservative portfolio that you're then maintaining for your income. What if you don't need all of your assets to generate income? What if half your assets are really intended to generate income and the rest was for legacy, for the kids or grandkids or whatever it might be?

I see where you're going Yeah.

The lifestyle and legacy goals. So oversimplified funds or plans or strategies can create inefficiencies.

Okay. And so once you reach the target date, do you continue to hold the fund, or what does the fund do? Is it all bonds at that point, or do we know?

I don't really wanna answer the question, because I'm gonna say it's always this way, and then they might change or the might be new target date fund. So just ask that question.

Yeah. Yeah. Yeah.

That's one one of the research questions you could ask, like, AI, like chat GPT, what happens for this specific fund, and it should accurately kind of define something. So it's not really a strategy, you're just it's defining what's written in the prospectus.

Oh, right.

Right. So, you know, GPT can be a wonderful thing in that sense for research,

but Yeah.

Here's my take on it though. The target date fund typically operates around something called the rule of 100. The rule of 100 is this old school methodology that says, basically, your age is the percentage of assets that you should have in bond funds.

Okay.

K? So if you're 50 years old, maybe 50% of your assets should be in bond funds. Right? If you're 40 years old, maybe 40% of your assets are in bond funds. If you're 70 years old, 70% of your assets should be in bond funds.

Now this methodology gives me heartburn, and the reason why is because it kind of ignores specific suitability or specific risk tolerance. It kind of ignores this, well, what's the market sentiment? Are we headed into a flat market cycle? Do we believe the markets are gonna go up? Are we in a situation to where interest rates are high and they're expected to go down?

Bond funds might make sense. But from 02/2008 or so until 2020, interest rates were historically low. In my professional opinion, I thought bond funds were a joke because they're either offering you a low rate of return or interest rates are gonna go up, and they're horrible. Yeah. So the reason why I bring this up is right now, interest rates are in a precarious situation.

Inflation's not under control. It's been managed, but interest rates could go up. What if inflation gets out of hand? What if there's temporary digestion from tariffs and inflation? And then, you know, prices skyrocket and then it leads to inflation.

Then that's not a perfect example because there's some nuance in that. Tariffs won't directly affect inflation. They could influence inflation. But my point being is interest rates aren't solved. Inflation's not solved.

And if you have a bunch of bond funds in a target date fund and inflation gets out of control and so inflation then skyrockets, your target date funds that quote, unquote lower risk Yeah. Still could lose a lot of money. Oh. And then you've got, you know, if the inverse happens, if interest rates drop, maybe you make a lot of money. But there's risk associated with it.

And I don't think the rule of 100 and target date funds properly explain these kinds of risks. Right. Just just my 2¢ on it. So Yeah. I do not like oversimplified plans or oversimplified funds for that standpoint.

I mean, if you're 20 years old, 30 years old, or even 40 years old, and that's an option in your portfolio, maybe? You've got twenty years. Why wouldn't you just buy a bunch of stocks and just let it ride out? You have to have the mental acuity for that, but, know, can you handle the ups and downs? But do you see where I'm going with it?

It's kind of a people like to hit the staples button and say that was easy. Oh, right. But there's just there's inefficiencies or nuances to where I don't think people are properly understanding the risk or lack of opportunity they're taking with these kinds of things. And the other thing too with it is, and to your question, well, do you do when, you know, the timer ticks. Yeah.

It's like, okay, now you're retired, what next? Yeah. So many people will come into our offices, and they'll say, All right, so I've prepared for retirement, I'm good to retire, what do we do? Right. How do we turn this pot of money in a four zero one k into a retirement plan?

There are so many questions. I mean, really retirement planning should start five years before you wanna retire. Ten years if you wanna be more proactive. Alright. There is no autopilot with this, in my opinion.

It should be more deliberate. It should be more intentional. It's like you don't just randomly run for a while, and then competitively run a half marathon or a marathon. There's training exercises, there's things to better prepare for, so it's more enjoyable experience. You don't just cook.

You learn how to cook if you wanna eat well. Everything in life, you don't just change the oil on your car, you probably ought to learn how the car works a little bit before everything in life, you don't just turn off your brain and suspend critical thought and just assume that things work out.

Mhmm.

There's a reason for lots of things, and that that's an aspect of life, including finance.

Yeah. There was a great television show that I was watching on Apple TV plus, not a plug for Apple TV. Wait. What show was it? This is a show called Pachinko.

Oh, yeah. And these two older characters, older adults are talking, and, one says to the other, we're told to live a long life, but no one ever told us how to pay for it. And I just thought that was so profound when he said it, I thought, oh my goodness, yes. We we don't know. So we don't know what we don't know, right?

So that's why we might wanna bring in someone who could sort of show us the way.

Yeah. I we did a a fun experiment here that's going out in our newsletter next, I think next Tuesday. We just asked ChatGPT to create a retirement plan. That was it. We just said, I've got a million dollars in my four zero one k.

It's all pretax.

Okay.

Create a retirement plan that's tax efficient, but the main objective is max income. Yeah. And what was really interesting is it wasn't max income. It was overly ambiguous. Mhmm.

And it kind of hid behind, well, you can have some income, but let's not have you pay a lot of taxes. And the result was they were getting roughly 20,000 less for the first seven years of their life. Each year, 20,000 less than they could have enjoyed for this very basic retirement plan. Okay. Because of oversimplified advice and not knowing the right prompts to ask, the right risks to avoid, and so on.

I love Mark Twain's quote where he says, It's not what you don't know that hurts you, it's what you know that isn't so.

Okay.

Almost without fail, when I ask people, What do you expect a portfolio should return? They get wild answers of wildly underneath, you know, wildly lowering the expectation

Okay.

Or wildly overestimating their abilities to invest in the market, because investors have short term memory. And then they say all these parroted lines, because they're just quoting some marketing material from some other company that has conflicts of interest, that they're selling one particular product, so they don't want you to buy the other product, and they just grossly over or underestimate the ability of various things. And it's just it's so interesting that we're so fixated on wanting to be right and wanting to sound smart that we forget to do the research, or that we're skewing our research, and we're distorting our ability to make a proper or healthy assessment of the tools that are associated with us, or they're associated with our plan or what could be a part of our plan or a part of our portfolio. And these distortions, are getting more and more polarizing, in my opinion, are just hurting people and their ability to create a balanced, holistic, and comprehensive plan. The reality is there's no such thing as a perfect investment product or strategy.

So that's why you have multiple mini portfolios within your overall portfolio. You manage multiple strategies so that you're ready for if the markets go up or if they go down, that you you balance the tax minimization. So if taxes go up or down, you're kind of able to navigate the nuance or the unpredictability of what the future might have in store, that you maintain the flexibility of income so that if inflation gets out of hand, you can make income adjustments. They haven't locked everything into a single income stream, and now you're stuck on living on fixed income for life, because that's claustrophobic. It's rigid, it's overly structured.

And so we need to be able to have that balance. We need to have that flexibility in the plan, and we've gotta be able to grow the assets. There's no way to take out risk. When people say a riskless retirement, they're talking about no market risk. They're not talking about inflation risk or tax risk or legislative risk or health risk or all these other risks that play a factor.

So we need to make sure we're defining the terms, anyway, I'm kinda what was the original question?

Yeah. I mean, this has been a long journey, but it's been a productive journey, think. Yeah. Should target dates be a part of my portfolio?

Yeah. So my final answer is, it's a great fun to use as you prepare to retirement, if you wanna hit the easy button for a little bit, but at some point, people I think should get off the easy train

Yeah.

And start paying more attention to the details, because it's the efficiencies and the strategies that are gonna help people get more out of their hard earned money, and autopilot in retirement, I think, is a dangerous thing. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcasts, just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles, or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility.

This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date, go to www.yourwealthanalysis.com today to learn more and get started.