Target Date Funds

Author: Tammy Doss

Choosing investments for retirement can seem like a daunting task.  Target date funds are an option that might be just for you.  Many 401K and IRA plans offer them.  As in any investment your tolerance for risk is a major consideration and you should always consult a professional.

How Target Date Funds Work?

This type of mutual fund automatically adjusts your asset allocation over time based on the date when the money is to be used.  If you want to retire in 2050 you would look for a fund with 2049, 2050 or 2051 in the name.  The idea is to get as close as possible to the date you expect to start withdrawing money from the fund.  These funds automatically shift your riskier investments, like stocks, to more conservative ones, like bonds as you approach the target date.  This balances the need for growth with the need to preserve capital and keep your retirement nest egg intact.

What is the Benefit of a Target Date Fund?

Simplicity sums it up.  You don’t have to actively manage your investments.  The fund will do it for you.  Set it up and forget about it until you are ready to retire and need to use the money.  You won’t have to constantly monitor your investments and worry about making risky investment choices.  The fund is set up to rebalance your asset allocation as it moves closer to the maturity date.  It also reduces the risks associated with having significant losses during market downturns.

What is the downside of a Target Date Fund?

Consider the fees and expense ratios when choosing a Target Date Fund.  The cost of these funds can be equal to 1% or more annually so fully understand that this investment strategy has a downside.  If you decide on a Target Date Fund educate yourself on the fees and do your homework along with your financial advisor to see if this is the best place for your hard-earned money.

What else should you consider?

Everyone has a unique situation.  Along with your financial advisor take into consideration your personal circumstances, your other investments, if you have other retirement assets, if you will be collecting social security.  You may get to a point where a Target Date Fund may no longer fit your needs.  For instance, if you have enough in other retirement assets you could continue to let your nest egg grow more aggressively and not be so conservative in your investment choices.  At that point you may want to get out of the Target Date Fund which as I mentioned before will automatically start adjusting towards a more conservative asset allocation.  If you have enough other retirement and social security and don’t need the funds it might be better for you to leave the Target Date Fund and change your strategy at some point.  This is why having a professional you know, and trust is essential to your long term retirement goals.   Enjoy your retirement!