Target Date Funds: Smart Investment Or Risky Move?

Target-date funds are a popular choice for investors saving for retirement, but they have their pros and cons. These funds are designed to simplify the process of investing for retirement by offering a set it and forget it approach. You pick a fund with a target retirement year, and the fund automatically rebalances your portfolio over time, shifting from riskier investments to more conservative ones as you get closer to retirement. While this hands-off approach can be convenient, it's important to consider the potential drawbacks, such as higher fees and a lack of customization. So, is it worth investing only some in target-date funds? Let's explore the topic further to help you decide.

Target-date funds are a set it and forget it option, removing the need to decide on a mix of assets and rebalance investments over time

Target-date funds are a "set it and forget it" option for investors, removing the need to decide on a mix of assets and rebalance investments over time.

These funds are designed to simplify the process of investing for retirement. They are a type of mutual fund or exchange-traded fund that automatically rebalances and reallocates assets as the investor gets closer to retirement. This means that the fund gradually shifts the majority of assets from riskier investments, such as stocks, to more conservative investments, such as bonds and cash.

The target date in the fund's name refers to the year the investor plans to retire. For example, an investor who plans to retire in 2040 would choose a 2040 target-date fund. The fund's asset mix will then automatically adjust over time, becoming more conservative as the target date approaches.

This adjustment is known as the fund's "glide path". At the beginning of the fund's timeline, assets are geared towards higher-risk, higher-reward investments. As the fund gets closer to its target date, it gradually becomes more conservative to preserve wealth. This aggressive-to-conservative switch doesn't happen overnight but follows a gradual glide path, ensuring a safe financial landing for the investor at retirement.

The chief advantage of target-date funds is their simplicity. They remove the stress and complexity of financial planning by allowing investors to put their activities on autopilot. The funds are also convenient, as they are the default plan for many employer-backed retirement plans such as 401(k) accounts.

Another benefit is that target-date funds prevent investors from making impulsive decisions based on market fluctuations. They also provide a form of inexpensive investment advice for people who might not otherwise be able to afford it.

However, target-date funds do have some disadvantages. They may carry higher fees than the index funds within them, and there is no guarantee of earnings, as all investments carry the risk of losing value. Additionally, some critics argue that target-date funds are "one-size-fits-none" and can become too conservative too quickly, potentially impacting overall returns.

Despite these drawbacks, target-date funds are a valuable option for investors who want a hands-off approach to retirement planning and don't want to manage their own portfolio.

Target-date funds are designed to age with you, automatically rebalancing your portfolio from growth investments to more conservative ones as retirement nears

Target-date funds are designed to simplify the process of investing for retirement. They are a "set it and forget it" option, removing the need for investors to decide on a mix of assets and rebalance those investments over time. They are a type of mutual fund that purchases from other mutual funds to build a diverse portfolio.

The "glide path" of a target-date fund can vary. Some funds become more conservative more quickly than others. It's important to monitor the performance of the fund to ensure it still meets your needs and risk tolerance over time.

The appeal of target-date funds lies in their simplicity. They provide a well-balanced, diversified mix of stocks and bonds, with an asset allocation that rebalances towards more conservative investments as you age. They are a good option for those who want to take a hands-off approach to managing their retirement investments.

However, it's worth noting that target-date funds may not be suitable for everyone. They are typically designed as a “one-size-fits-all” strategy and may become too conservative too quickly as you approach retirement. Additionally, they may carry higher fees than if you were to manage your investments independently.

Target-date funds are a default option for many employer-backed retirement plans, such as 401(k) accounts

Target-date funds, also known as life-cycle funds or target-retirement funds, aim to continually strike the right balance between the risk necessary to build wealth and safer bets to protect a growing nest egg. The fund automatically rebalances your portfolio with the right mix of stocks, bonds and money market accounts as you age. These are mutual funds that purchase from other mutual funds (known in the business as a "fund of funds") to build a diverse portfolio. While you set and forget, the fund updates your asset allocation through the years.

Early in your working life, a target-date fund generally is set for growth by having a much larger slice of your portfolio in stocks rather than fixed-income investments like bonds, which are safer but provide smaller returns. As your retirement year approaches, the fund gradually shifts toward more bonds, money market accounts and other lower-risk investments.

Your retirement year is the "target date" of most of these funds, and the funds are conveniently named to correspond with your planned retirement year. Say you are 40 years old and plan to work until you are 65. Most target-date funds are named in five-year increments, so you would choose the provider with a fund named with the year nearest your planned retirement date.

The chief appeal of target-date funds is their simplicity. “If you think about putting together funds as you would cook a good meal, asset allocation is the choice of ingredients that goes in,” says Laura Scharr, principal at Laura Scharr Coaching, a financial coaching firm in Columbia, South Carolina. With target-date funds, “it’s an instant meal — they’ve put all the ingredients together for you.”

Another advantage of target-date funds is that they keep investors from being their own worst enemy by being too reactive to the market's twists and turns, which often results in buying high and selling low.

“In 2008, most 401(k) holders stuck with their plan, while in the parallel world of do-it-yourself investors, emotions got the best of them and they pulled out,” says financial advisor Jonathan Broadbent, founding partner at Plan Partners in Beachwood, Ohio. Those who exited eroded their ability to benefit from the long bull market that followed the crisis, Broadbent says.

Target-date funds are a common investment option for 401(k) accounts. In 2023, 64% of retirement contributions were invested in target-date funds, up from 59% in 2022, according to Vanguard. The Pension Protection Act of 2006 helped employers develop retirement plans and set up automatic enrolment, making target-date funds an easy option for retirement plans with their low fees and diversified portfolios.

Target-date funds are associated with good outcomes for investors, delivering positive returns and helping investors avoid poor investment decisions

Target-date funds are a popular choice for investors saving for retirement. They are associated with good outcomes for investors, delivering positive returns and helping investors avoid poor investment decisions.

Target-date funds are designed to simplify the process of investing for retirement. They are "set it and forget it" funds that automatically rebalance your portfolio from growth investments towards more conservative ones as you age. The funds are named according to the year of your planned retirement, and you choose the fund with the nearest target date to your planned retirement year. For example, if you are 40 years old and plan to retire at 65, you would choose a target date fund with a target date of around 2045.

The main advantage of target-date funds is their simplicity. They provide investors with a well-balanced, diversified mix of stocks and bonds that rebalances towards more conservative investments as you age. This rebalancing happens without any input from the investor, who simply needs to contribute to the account. The fund managers take care of the rest, including deciding on the mix of assets and rebalancing the portfolio over time.

Target-date funds are particularly beneficial for young investors, who initially own a higher proportion of equities, providing a foundation for growing returns over the long term. As investors age, the ratio shifts in favour of fixed-income investments, such as bonds, which are safer but provide smaller returns. This makes target-date funds a good option for those who want to take a hands-off approach to managing their retirement investments.

In addition, target-date funds can help investors avoid making poor investment decisions. They keep investors from being too reactive to market twists and turns, which can lead to buying high and selling low. They also provide investors with cost-effective advice, helping them find a sane investment mix given their life stage.

While target-date funds have their benefits, it is important to note that they may not be suitable for everyone. They are often criticised for being "one-size-fits-all" and may become too conservative near the retirement date. It is crucial to do your research and consider your individual financial situation and goals when deciding whether to invest in target-date funds.

Target-date funds are not bespoke, using a single data point—expected retirement age—to determine the portfolio's asset allocation

Target-date funds are a popular choice for investors saving for retirement. They are designed to be a "set it and forget it" investment option, where investors pick the year they think they'll need to access the funds, and then the fund management company takes care of the rest. The funds are designed as a one-stop investment shop with a diversified set of asset classes.

One of the main advantages of target-date funds is their simplicity. They are easy to use and require little to no input from the investor, making them a good option for those who want a hands-off approach to their retirement investments. The funds automatically rebalance and reallocate assets as the investor gets closer to retirement, typically shifting from riskier investments such as stocks to more conservative investments such as bonds and cash. This is known as a "glide path".

However, one criticism of target-date funds is that they are not bespoke. They use a single data point, the expected retirement age, to determine the portfolio's asset allocation. This means that the funds may not be suitable for investors who want a more customised or tailored investment strategy. Additionally, target-date funds may become too conservative too quickly, lowering the overall potential return and potentially impacting the investor's retirement income.

Despite this, target-date funds have been praised for providing positive outcomes for investors. They take asset allocation and investment selection out of the investor's hands, harnessing their natural tendency towards inertia for the good. The funds also provide cost-effective advice, with no additional fee for the investment advice that is included.

Frequently asked questions