Target-Date Funds Explained

Brett Rice

| May 5th, 2022

Target-Date Funds Explained

We all know how important investing for our retirement is, but many people don’t want to take a hands-on approach. Target date funds can be the solution; they allow you to take a set it and forget it approach to retirement investing.

What is a Target-Date Fund?

A target-date fund (TDF) is a mutual fund or exchange-traded fund (ETF) that, over time, gradually rebalances and reallocates its assets as you get closer to retirement, generally shifting assets from riskier investments like stocks to more conservative investments like bonds and cash equivalents.

How Target Date Funds Work

Investors choose the year they think they’ll need to start accessing the funds, typically the year they expect to retire, so TDFs are very much meant to be long-term investments. TDFs are typically structured as a mutual fund. The investments within are determined by the fund's objectives which are detailed in the prospectus. Most TDFs are structured as a “fund of funds,” meaning they invest in other mutual funds instead of individual securities.

TDFs give investors a diversified portfolio that rebalances over time to focus less on potential growth and more on producing income. A TDF can be designed to take an investor “to” or “through” retirement. A “to retirement” fund will reach its most conservative allocation on the date of the fund’s name. After that date, the allocation typically doesn’t change throughout the investor’s retirement.

A “through retirement” fund continues rebalancing and typically reaches its most conservative allocation after the target date. These funds continue to become more conservative over time but may not reach their most conservative allocation until a time well after the investor is past the traditional retirement age of 65.

Pros of Target Date Funds

Hands-off: For retirement investors who don’t want to take an active role in choosing or managing their investments, TDFs can be a good option.

Diversity: TDFs are diversified, which helps insult your portfolio from risk.

Removes emotion: The biggest threat to your investments is you! Making investment decisions based on emotion, especially fear, is almost always has a poor result. TDFs eliminate the element of human emotion from investing.

Cons of Target Date Funds

Not customized: TDFs are one-size-fits-all, but the right mix of investment for one person is not necessarily the right mix for another.

Higher expense ratios: Some TDFs have a fee for the underlying mutual funds within the TDF and another fee for managing the fund, and those fees may be more expensive than other retirement fund options.

Not adaptable: If your needs and goals change over the years, a TDF may no longer align with those needs and goals.

How to Invest in a Target-Date Fund

There are three ways to invest in a TDF:

401(k): When your employer gives you a selection of 401(k) options to choose from, a TDF is likely at least one of the options.

Brokerage account: You can open a brokerage account with a fund manager or online broker and browse TDFs.

Direct: You can buy a TDF directly from a fund provider like Vanguard or Fidelity.

Some funds have a minimum initial investment ranging from $500 to $3,000 or more, but some will waive that requirement if you set up automatic monthly deposits to your account.

In Closing

Some people consider a TDF the only retirement investment fund needed. But just reaching the target date doesn’t mean you’ve saved enough to meet your retirement savings goal. Meeting that goal depends on how much you invested in the fund, how many years your money in the fund has had to grow, the fund’s market performance, and what other sources of retirement income you will have.

If you have questions about target-date funds in particular or retirement investing in general, feel free to schedule a meeting with me.

By Brett Rice

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