Why target date funds might not be the best retirement tool
Target date funds are an incredibly popular retirement tool. According to the investment company Vanguard, 99 percent of its participants are in plans that offer target date funds. The funds, which shift from more aggressive investments to more conservative as the desired date approaches, can be helpful. But like anything, it’s worth considering all aspects of target funds before you sign up.
The reason people like target date funds so much is that they’re designed to keep the investment waters calm as you near retirement. The funds are allocated more aggressively in their early years, with a focus mostly on stocks. Then, as your date approaches, the allocation shifts away from stocks and to bonds and securities. The idea is that this approach will protect you from market volatility that could wipe out your savings right when you’re set to retire.
Despite this smart strategy, target date funds aren’t perfect. As Money points out, for starters, as people live longer, the timeline for the funds to provide adequate income also increases. If your funds are too conservative, you could miss out on better returns. The target date is based on just one aspect of your life: Your birthday. In reality, a smart investment strategy considers many things, not just when you were born and when you’re likely to retire.
While target date funds are a good tool, you should check in on them regularly (as you should any of your investments). This is especially true the older you get. Make sure the funds are set up in a way that fits your financial profile. As you near retirement, less risk is good, but smart risk is better.
Content by Savvy Money