« Happy New Year | Main | Cold Weather - Cold House »
Sunday, January 03, 2010
Retirement Housing
We are in the process of building a new house. This involves spending our retirement on the new house. The reason is that we are currently stuck in a house that is falling apart, so we are forced to spend the money on housing now or get into some serious housing issues later. I will chatter more about the actual house issues in a future entry. For now, I have been looking at the retirement funds, and found something interesting.
Part of our 401(k) is invested in a Lifecycle Fund. A Lifecycle Fund is a mutual fund which automatically reallocates the money between equity and income investments based on our age. The point of it is to minimize the risks of losing the money before retirement actually happens.
In the most recent annual report from this fund there is a section called "Principal Risks". Here is the section, quoted in its entirety.
The fund is subject to asset allocation risk, market risk, company risk, foreign investment risk, style risk, growth and value investing risk, large-cap risk, small/mid-cap risk, interest rate risk, income volatility risk, call risk, credit risk, market volatility and liquidity risk, prepayment risk, extension risk, index risk, the special risks of investing in inflation-indexed bonds, active management risk, quantitative analysis risk and derivatives risk. For a detailed discussion of risk, please see the prospectus.
If those are the principal risks, I wonder what the hidden risks are. I am now truly afraid to read the prospectus, as suggested.
For this, we are paying the investment company 0.66% of the net asset value each year. That means, that the first 2/3 of a percent of the return on this "investment" goes directly to the people who are running it, not to us. That is true even if there is no 2/3% return at all. Sounds like we are the only ones subject to any of the risks.
I think maybe the house is a better investment.