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Have you ever heard of target-date retirement funds? This topic came up when I was reading The Millionaire in the Next Cubicle, and I had heard the term used at work during an investment information session.
I have always been eager to start saving for my retirement. I want to be able to afford what my grandparents have done and retire into one of the retirement communities in Virginia. I think it would be a lovely way to live my golden years and I’m cautious about how the best way to save for it is. Reading about target-date funds made me wonder if I could do it. My work doesn’t currently offer target-date retirement funds, but someone mentioned how it is a good ‘set it and forget it’ investing option, which got me curious: are there actually funds out there that you can set and forget? And would you want to?
5 Things to Know About Target Date Retirement Funds
- According to the SEC, target date retirement funds are also known as target date funds or life-cycle funds. They are often mutual funds and hold a mix of stocks, bonds and other investments. They are designed to be long-term investments for individuals with certain retirement dates in mind. The name of the fund often refers to its ‘target date’ – for example, if I planned on retiring by 50, my fund could be named ‘Retirement Fund 2040’ or ‘Target 2040’.
Over time, the mix of investments in your target date fund shifts according to the fund’s investment strategy. That is, as you approach the date of your retirement, the fund re-balances away from stocks and more towards bonds. If it were 2035, my fund would probably look a lot more conservative than it did in 2014.
- As with many investments, returns on target date funds are not guaranteed. It depends on how the stock market is doing, and when your ‘target date’ is up, you may not have as much money for retirement as you expected. It’s a good idea to keep an eye on your investments, be realistic about your future, and not depend entirely on one investment to see you through your golden years.
- According to CNBC, there are more than 600 existing target-date funds out there, and each comes with its own fee structure, risk profile and asset mix. This makes performance measurement difficult – and means you will need to do some investigation into which target-date fund is right for you.
- Be aware of ‘to’ and ‘through’ plans. In a ‘to’ fund, the asset-allocation mix for your target date retirement fund is set to reach its most conservative point at the assigned date. In comparison, the ‘through’ fund will continue to balance for growth well after the assigned date. In general, ‘to’ plans are more conservative, increasing cash and bond amounts dramatically in the last few years before the target date. The ‘to’ plan is generally seen as for someone who plans on cashing out the fund at the target date to purchase an annuity.
- If you’re interested in pursuing a target-date retirement fund investment option, always, always do your homework. Make sure to look for low-fees and check past performance. Don’t forget: you can always do it yourself, balancing your portfolio every few years to be as aggressive or conservative as you need it to be. It may be a little more work than a ‘set it and forget it’ target date fund, but at least you will know exactly where you stand on your investments.
Personally, if work ever offers a target date retirement fund option, I would probably look into it. For now, I have my 401(k) (which I just rebalanced this year to be more aggressive), and a Roth investment account. For me, that’s enough to keep track of at this moment!
Will @firstqfinance says
My work offers target date funds but I avoid them. Because #1 their fees are too high, #2 they don’t take into account your assets in other accounts. So you’re really not getting the perfect mix of everything if you have anything outside the TDF and #3 I’m not a wage slave who has some sort of mid-sixties retirement expiration date.
🙂
Melissa says
Ooo, fees! I hate them! Also, good point on #2. If you have other investments, with a target date fund, you may become too heavily invested in stocks (or bonds, etc.) and leave yourself at risk (either too aggressively or too conservatively). This is probably a better option for people who just do not want to think about retirement or investments at all. Not us PF-bloggers, of course, but some people (like a lot of my friends). Which is fine… as long as they keep an eye on fees! 🙂
Amanda @ My Life, I Guess says
Well… might as well be honest. I don’t have a retirement fund. Like, at all. Even so, I don’t know that I could commit to a target-date fund right now, as I have no idea when I’d like to retire. In the perfect world it’d be sooner rather than later, but right now I just want to get back to work!
Melissa says
Aww, well you don’t have to be ashamed you don’t have a retirement fund. Honestly, I wouldn’t have one either right now if one wasn’t provided/set up for us at work. They give us an option to invest (no match). Even without a match, it’s nice having work push you to invest in retirement. Hopefully you find a good place to work soon, and maybe even it will have a retirement investment option for you! 🙂
Femme @ femmefrugality says
For me, if I was going to do all the research on the fund anyways, I’d rather just set up my own portfolio mix that I could adapt should my needs change, which had happened a lot throughout my young life already lol. But that’s just me. It seems like a decent option for those wanting to set and forget.
Melissa says
Agreed! I figure, if I’ve studied this for so long, I now have a vested interest in my portfolio and don’t want to set it and forget it. But I have a lot of friends who don’t feel that way, and they get overwhelmed thinking about investing, so this type of investment vehicle could be really good for them.
Jean @ NearlyRetired says
I’ve avoided the target date funds because it’s harder to know if they’re really doing the mix of investment types they say they’re targeting. The whole idea of an ‘autopilot’ approach makes me nervous.
Melissa says
That’s a really good point, Jean. There is a level of control you give up to have a target date retirement fund, and it’s certainly not for everyone. Thanks for your perspective!
Mel says
I never realized there was a difference between to and through. I’ll have to check mine now. I like my target date fund. It’s definitely not my only retirement fund, but it is what my Roth IRA is set up for. I think if I’d had to figure out how to pick a fund back when I opened that thing, I would’ve been overwhelmed and done nothing… but figuring out when I wanted to retire and how aggressive I was comfortable with it being was a decision I could handle.
Melissa says
Yes! That’s my point! I know a lot of people who don’t want to think about a lot of options when setting up their retirement accounts, and a target date is, in my opinion, a great start to setting up a retirement account. It’s not the answer for everybody, but of course, personal finance is personal, so thank goodness there are a lot of options out there 😉 Also, I’m glad you got some new information out of this post! 🙂
Toni @ Debt Free Divas says
Thank you for going into detail here. I need to add this to my retirement roundup. Getting to middle age now and need to understand more than the 401K.
Melissa says
Toni, I’m so glad it was helpful!