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A target date fund or CD?

Question: I retired from teaching in Michigan in 2005 and immediately took a job teaching in China. I'm now 62 and currently receive my teaching pension of $30,000. I'm fortunate to still have approx. $350,000 in high-fee mutual funds, 403(b), and IRA.

I'm also fortunate to be able to save approx. $20,000/year from my job in China. I want to invest this money and would like to hear your opinion about CDs versus a target retirement fund. Is it "too late" for me to do a target retirement fund? I don't think I will need this money for several years and I plan to teach for another two years. What are the advantages and disadvantages of each - other than the obvious one that the CD will hold its value and the target fund might not? Should I be considering something else instead of these two investments? Thank you. Janet, Kalamazoo, MI

Answer: Teaching in China must be a fascinating job. On the financial side, target date funds and a CD are two very different investments. You've hit on the key distinction: Risk.

There are target date funds for people at or near retirement. Yet it's apparent the risks of these funds are greater than the marketing of their conservative reputation suggests. A number of target date funds dropped 25% or so in value during the bear market thanks to a hefty exposure to stocks. The fund companies justify the large stock portion by emphasizing that most retirees live another 20 years or so, a fairly long time horizon. The observation about longevity is right. That doesn't mean the "conservative" target fund portfolio should hold much in the way of stocks. Remember, this is supposed to be the retiree's conservative investment option. As one money manager put it to me, maybe the mutual fund companies should market target date funds as death funds instead. Somehow, I don't think savers would embrace them as readily.

The advantage of the CD in an FDIC insured institution is that the safety of those savings is guaranteed. The drawback: You'll make a pittance in interest on your money.

The question of "how to invest the money" is actually quite complicated, depending on how your going to spend money when you get back to the States. You have a pension, savings, you'll eventually start taking Social Security, and so on.

That said, one thought is to take the savings from teaching in China and decide how much of it you want to be safe for when you come home and how much you'd like to put at risk to the stock market. The "safe" money could go into Treasury bills (no default risk; will hold its value against inflation if it rises), short-term CDs (no default risk; can reinvest at higher interest rates if inflation surges) and teh U.S. Treasuries I-bonds (no commission costs; no inflation risk; compunds tax deferred but should be held for at least 5 years to get the full interest benefit). Then, with the remaining portion you're comfortable with putting at risk to the vagaries of the stock market, invest it in a very low cost broad-based stock equity index fund. This way you can tailor a low-fee portfolio to what you'll need over the next several years.

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