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Many retirement programs and pensions have limited their choices when it comes to funds. Many 401ks and other programs only offer a select few mutual funds called target funds. These funds seem great at first, until you look at the high fees and the generalities surrounding them.

Target funds are usually sold by dates every five years. A target fund is sold as a date such as “2045” and will be invested in a style that will best fit someone who wants to retire by 2045. The underlying problem is that some people need high growth rates to retire at 2045, while others just need to earn a decent return. Target funds should not be taken as a promise that you will have sufficient funds to retire in 2045, but rather that the manager will allocate assets as best as he or she can to grow your wealth now, and protect your capital as you near retirement age.

Often these funds are just a “salad” of other funds. The managers place money in different mutual funds to reach a generally accepted asset allocation to protect your money and provide decent returns. Unfortunately, this means you also pay double fees as you will have to pay for the manager to manage your money and for the fees for the funds in which your money is invested. The target fund is merely the middle man for other funds.

These funds also rarely ever have your best interest in mind. The manager will likely take the target fund money and invest it only in funds offered by the same firm. It would be equivalent to a stockbroker only selling you investments that he holds, or selling you the highest rate fund he can find. Target date funds have a large amount of capital because of the overwhelming number of investors who are privy to getting ripped off.

If you can, try to avoid the target date funds altogether. For the most part, they are nothing but renamed index funds with double the fees.

This is a very difficult question to answer for most people.  You have to factor in pension plans, future social security, and other streams of income before deciding how much you will need each month for expenses.  A good estimate is that you will need 80% of your current income to be generated by an interest rate of 4-5%.  For someone making $50,000 per year, you would need $1,000,000 in retirement funds to live comfortably.

Max out your benefits

You should first try to max out the amounts that employers will match in 401k plans.  Matching funds is free money given by your employer to coerce you into planning for retirement.  A common match is 50% up to 6% of your income, meaning that your employer will give you 3% of your income on top of the 6% that you saved through the year.  You simply cannot beat free money.

Asset allocation

Monthly contributions are best

The best way to invest is to start early and make monthly contributions to a retirement account.  Monthly contributions will help you ride out the ups and downs of the business cycle.  Focus first on maximizing retirement benefits then start applying money to other accounts such as IRAs and other retirement portfolios.  Employer matches are low hanging fruit–pick it first.

The stock market is in a frenzy over the possibility of a US Recession and a slowdown in economic activity.  To understand all of this data, we must first know the definition of a recession.

By definition, a recession is three consecutive quarters of negative GDP growth.  GDP is the consumption + gross investment + government spending + net imports of the entire country.  When GDP goes down, it is said to be a fall in economic activity but this is not entirely true.

GDP isn’t a real indication of growth

As you can see, the GDP can be easily manipulated by the government spending and gross investment inputs.  When the Federal Reserve acts by issuing more credit, as they have done for a total of $180 Billion in the last few months, they can tamper with the data and improve economic indicators.

Because a recession is defined as a drop in GDP, inflating the money supply and increasing government spending is a surefire way to make the economy look better, at least on paper.  GDP does not account for the change in the value of currency over time and can only be compared against dollars, not foreign currencies.

If the Federal Reserve were to issue credit worth half of the current GDP, all economic indicators would show that the economy is growing at a breakneck pace of 50% per year.  Inflation is not accounted in the GDP statistics, so inflating the money supply has become the method of choice to prop up the economy.  The Federal Reserve is in frenzy to issue more credit and cancel out the losses by mortgage companies and investment bankers alike.

The Great Depression

History tells us that the Great Depression was caused by a reduction in the amount of credit by the Federal Reserve.  The Federal Reserve had let the money supply shrink by 33% over the course of the Great Depression, causing the markets to crash and billions to be lost.

Today we face the same crisis.  Billions of dollars has been lost so far due to the real estate bubble.  An overextension of credit coming from low interest rates and high amounts of credit have caused a bubble that’s ready to burst.  Unless the Federal Reserve continues to inflate the money supply at a monstrous pace, the market is ready to correct in a big way.

There is approximately $1Trillion in US legal tender, paper currency that is.  Unfortunately there is also $10 Trillion in credit, debt and bank accounts that has been created out of thin air; money that has been leveraged through the system so that everyone has a bigger and bigger piece of the pie.  If the Federal Reserve were to stop printing money, and the credit system were left to collapse, the stock market would be worth just one tenth of what it is today. 

Recession is already upon us because of the slowdown in credit growth.  The Federal Reserve will have to continue to issue credit in order to keep up the GDP statistics and hold the markets together.  Once investors get wind that the GDP has been manipulated, we’ll see the sell off of the century.