By this point, you likely already know how important it is to save for retirement. Maybe you’ve already got an investment account set up and ready to go — or maybe you’ve even amassed a sizable nest egg.
Kudos! Because the scary fact is, we’re living in a country in which more than half the population is concerned about outliving their retirement savings… and in which a significant chunk have nothing saved for retirement at all. But the fact remains that opening an account, and even funding it, isn’t enough. You’ve got to allocate those assets for them to grow. But how best to do so?
What is a Target Date Fund?
One common approach to retirement savings is to use a product called a target date fund. Like other types of mutual funds, a target date fund is a pre-arranged “basket” of stocks, bonds, and other securities, which is chosen and managed by a third party so you don’t have to do any of the investigative footwork.
Target date funds, as the name suggests, are built to target a specific retirement date, and gradually become more conservative as that date draws nearer to preserve the accumulated wealth it’s built over time. These products are usually long-term in nature; for instance, Vanguard launched its 2065 Target Retirement products in July of 2017, giving them a 48-year horizon.
Target date funds may seem like a no brainer to investors who are looking for an easy and effective way out. You don’t have to do the work of allocating assets, and the fund is automatically rebalanced over time to follow the traditional trajectory of risk tolerance. Sounds like a pretty great solution, right?
Well, it can be. But it also takes a lot of flexibility out of your hands — and depending on your unique circumstances, these funds may not offer the kind of aggressive growth you need to fully realize your retirement goals.
That’s not to say they can’t be employed wisely! Here are our tips on how and when to best use a target date fund.
How to Properly Use a Target Date Fund
If you do decide a target date fund is the right investment strategy for you, we suggest you follow a few key rules to ensure it works as well as possible.
1. Don’t mix and match.
When it comes to target date funds, the whole point is simplicity. So don’t go making your portfolio into a complicated mess by layering different target date funds or adding other types of mutual funds into the mix. Instead, we suggest picking one fund that offers either the correct approximate retirement date, a favorable underlying asset allocation, or (ideally) both, so as to most effectively help you meet your objectives.
2. Start early, if you can.
Target date funds work best for beginning accumulators, who still have a long horizon over which to meet their growth requirements. They can also work for investors midway through their career, though it’s important to consider all your options, especially if you need to play a bit of catch-up.
3. Set it, but don’t forget it.
As you approach retirement, you’ll want to think hard about the biggest drawback of target date funds: as they age, they’re designed to preserve, though not necessarily grow, your retirement investments. (That’s not to say some growth won’t occur.)
Nevertheless, the significant bond allocation in the late-stage versions of these products may not successfully carry someone through their retirement, depending on how long you plan to kick back or how luxuriously you’d like to live while you do so. While we don’t have any issue with a conservative initial allocation once you’re retired in theory, eventually, you’ll need some growth assets to stay ahead of taxes, inflation, and withdrawals.
Making the Right Decisions for YOU
Bottom line: while target date funds are a fine product for many investors, fully understanding their intended uses and outcomes can empower you to make the right decisions for your investment life cycle.
And on that note, we’re also here to help! Whether you’d like assistance in choosing the correct target date fund for your needs or you’d like to explore other investment options, we work hard to ensure that your wealth is there to serve you as you deserve after a long and fulfilling career.
If you aren’t already working us, you can reach out to us directly to schedule a free introductory meeting either in person or by video chat — whichever is easiest for you. And if you’re already a client and thinking it’s time to reimagine your investment strategy, we’d be happy to sit down and look over the options together!