ASK KIM


Target Funds Make Investing Easy

Kimberly Lankford

My son is in the Army in Iraq and has no investments. Do you have any advice for him for selecting a fund?



My son is in the Army in Iraq. He has no investments to speak of and is single. He wants to put much of his income into some form of investment, most likely a mutual fund due to the lack of communications. Do you have any advice for him for selecting a fund? His time to read is very limited.

The easiest way to invest in mutual funds is through a life-cycle fund (also called a target fund). These funds invest in a portfolio of other funds based on an investing timeframe. They start out with more money invested in stock funds -- when you have years before you plan to touch the money -- then gradually become more conservative as your goals get closer.

The life-cycle fund adjusts the investments automatically -- you don't need to make any changes yourself. Think about how long you'd like to keep the money invested, then find a life-cycle fund that ripens on that date. If your son is investing the money for retirement and he's currently in his 20s or early 30s, consider one with a 2035 or 2045 date, depending on his age and when he plans on retiring.

When picking a life-cycle fund, though, be careful about fees. Because they're funds of funds, they can have two layers of fees: those for the funds and an additional expense on top. It's best to focus on ones charging 2% or less -- and staying under 1% is even better. Also check out the performance of the underlying funds.

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Take a look at American Century, Fidelity, T. Rowe Price and Vanguard. Each fund firm has slight variations on its stock versus bond allocation. T. Rowe Price's life-cycle fund invests more heavily in stock funds in the early years than the others and tends to come closest to the portion that Kiplinger's recommends in its retirement-savings portfolios. For more about these fund companies' life-cycle funds, see The One-Stop Solution.

However, there's an even better option for your son for his retirement savings. Because he's in the military, he's eligible for the Thrift Savings Plan for employees of the federal government and members of the military. Like a 401(k), money invested into that plan lowers taxable income and grows tax-deferred until the money is withdrawn in retirement.

While he's deployed, his income is probably tax-free anyway, but he'll still get benefits when he withdraws the money. When it's time to make a withdrawal, a proportionate share of taxable and tax-exempt money will be taken from his account. Tax-exempt money he puts in comes out tax-free, and earnings on his tax-exempt contributions continue to grow tax-deferred. Plus any bonuses and combat pay he receives aren't subject to the regular contribution caps. For more information about the tax rules for combat pay invested in a TSP, see the TSP Features for Uniformed Services at the TSP Web site.

In fact, the government TSP just started offering life-cycle funds. For more information about its life-cycle fund choices, see Questions and Answers about the L funds and the L funds fact sheet.

Got a question? Ask Kim at askkim@kiplinger.com.




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