AARP pares savings options to three well-balanced funds

Your Money

December 24, 2006|By Carolyn Bigda | Carolyn Bigda,Tribune Media Services

It's nice to have choices. But in some cases too many options may be more detrimental than helpful.

At least that's the idea behind a new series of mutual funds that AARP Financial, a subsidiary of the membership organization, introduced in January.

And though AARP is geared toward the 50-plus crowd, these funds may be just as appropriate for investors in their 20s.

AARP Financial was launched in 2005 in response to worries that workers are not accumulating enough savings for retirement.

Half of workers 55 and older saving for retirement have accumulated less than $50,000, excluding their home's value and any expected pension, according to the 2006 Retirement Confidence Survey from the Employee Benefit Research Institute.

Nancy Smith, vice president of investment services at AARP, believes one reason retirement nests are virtually empty is that investors are overwhelmed by choice.

We worry about picking the right allocation, or mix of assets. We can't pony up the minimum required to buy into a mutual fund. We pick investments that are too risky or too conservative.

"These investor mistakes, over time, lead to less money," Smith said. "People need a clearer path to saving for retirement."

Enter the AARP funds.

They have only three fund options, simplifying your choice. Each is a balanced fund, investing in both U.S. and international stocks and bonds. As a result, you receive diversification with just one fund.

The funds vary, based on their ratio of stocks to bonds, from aggressive (more stocks) to conservative (more bonds).

In addition, the funds are rebalanced automatically so that market swings do not distort the investment mix. And instead of relying on manager picks to buy individual stocks and bonds, the funds invest in index funds, which track market benchmarks.

The end result is a more simplified investment approach and low expenses: 0.5 percent annually.

Even more, you only need $100 to start investing. At the Vanguard Group, the minimum initial investment typically is $3,000 and at Fidelity, $2,500.

Are these funds for you? Here are some tips:

Max out your 401(k) first.

If you have limited cash to save for retirement, and your employer offers a 401(k) or 403(b) with a match, start there first.

You can invest even a small percentage of your income, say 3 percent, to begin. On a $30,000 salary that translates to roughly $35 per paycheck, assuming you're paid biweekly.

In addition to beating minimum investment requirements, your employer's match - essentially free money - will help pad your savings even more. And you can make contributions before your paycheck is taxed, helping lower your overall tax bill.

Assess your risk tolerance.

If you're not eligible to participate in your employer's retirement benefit plan or a match is not offered, then one of the AARP funds may be right for you.

But consider your risk tolerance and time horizon first.

AARP's most aggressive fund holds 75 percent stocks and 25 percent bonds. Meanwhile, many target-date funds, which base the asset mix on a specific retirement date, such as 2040, will hold as much as 90 percent stocks. (As your retirement date nears, the mix grows increasingly conservative. Balanced funds, on the other hand, do not change.)

Smith argues that investors who own mostly stocks are more likely to pull their money out of the market when there is a downturn.

"You have to balance risk with return," she said.

But if you can handle the volatility, young investors have the advantage of a long time horizon to ride out those setbacks and enjoy stock returns, which historically outperform bonds.

"Someone in their 20s should be invested aggressively and not paying attention to prices day-to-day," said Roger Wohlner, a financial planner with Asset Strategy Consultants in Arlington Heights, Ill.

Shop around.

Wohlner points out that most balanced funds maintain a 60/40 ratio of stocks and bonds, which means AARP is more aggressive than most. But it's well worth shopping around at other fund companies, looking at both the balanced and target-date offerings.

Plus, some shops, such as Baltimore's T. Rowe Price Group Inc., will lower the minimum initial investment if you sign up for monthly automatic contributions.

Carolyn Bigda writes for Tribune Media Services.

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