Target-Date Funds: A Retirement Bull's-Eye?
Ready, aim, retire. Just figure out when you want to retire and then pick an investment targeted to that date, right? Not so fast, there's more to target-date funds than that. Here's what you need to know.
What's the target?
Target-date funds are mutual funds with an investment strategy that usually becomes more conservative as you get closer to retirement (or when you want to begin to withdraw funds). The mix of investments depends on how much time a fund has until the target date. For example, a 2040 target-date fund is setup for someone planning to begin withdrawing money in 2040 and would currently have an asset allocation of more stocks than bonds. However, a 2015 target-date fund is more conservative since the target date is closer and preserving assets more than growing them is the goal.
Aim, release, invest
Simplification is a main advantage to target-date funds. You let the experts do the heavy lifting when it comes to selecting the target-date fund's individual securities. On the flip side, this management may come with higher costs than other investments. And because experts are managing for a group, they don't take a customer's individual risk tolerance into consideration.
Many investors start out with the right mix of assets, but they don't adjust it over time. With a target-date fund, experts regularly rebalance the assets of the fund. That said, you should still keep an eye on the fund, regardless if someone else is managing it. It is up to you to invest enough to meet your goals and there is no guarantee the fund will provide an adequate income at or through retirement. Target-date funds provide diversification over a long-term period. But gains aren't guaranteed and losses are a possibility. Other risks can be carried by target-date funds underlying assets; which are often mutual funds and exchange traded funds. When all is said and done, a target-date fund could help you hit your retirement bull's-eye, but it's not suitable for all investors. Make sure to read and carefully consider the fund's prospectus thoroughly before you release the arrow, it contains information including investment objectives, risks, charges and expenses.