Is a Target Date Fund Right for You?
You're busy, and poring over investments is a pain. Wouldn't a target date fund be easier? Take a look at their pros and cons to see if incorporating one (or more?) into your retirement plan makes sense for you.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
What year do you want to retire? That single question is the concept behind target date funds, which are quickly growing in popularity.
Target date funds debuted in 1994 as a simple option for retirement savers. They are mutual funds, based on the year the saver plans to retire. Let’s say you are 50 years old and you plan to retire at age 65. You would select the target date fund for the year 2036 — or more likely 2035, as target date funds tend to come in multiples of five. The target date fund is actively managed for the rest of your life, rebalancing to adjust risk as you get older and closer to retirement.
As more retirement savers turn to this option, there are some pros and cons to keep in mind.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Some Pros of Target Date Funds
Conceptually, target date funds are great; they are a simple solution for people who either don’t want to deal with investing or who are intimidated by money. They are a good option for investors who are hands off and who wouldn’t rebalance their investments on their own. Target date funds are also good for DIY investors, because they are a more comprehensive strategy than picking on past performance, which is the way do-it-yourselfers often pick investments. They would pick the stocks that did well in the last quarter or year, which is not a successful strategy, because past performance does not necessarily indicate future growth.
Some Cons of Target Date Funds
Target date funds are not individualized for a person’s specific situation; they treat every person who will retire in a certain year as the same. However, every person is not the same. They have different income needs, lifestyles and resources in retirement. People should have an individualized income plan for retirement, and target date funds can’t do that.
Another con is that many people are not digging deep enough to find the best target date funds when it comes to internal costs, asset allocation and how the funds are managed. They are also not taking the time to figure out how to incorporate a target date fund into an overall retirement strategy. If you have a Roth or traditional IRA, how are the two complementing each other? Target date funds should be part of a complete retirement plan.
Things to Consider
Diversification
To be truly diversified, retirement savers need to divvy up their money between the different types of asset classes — including liquid assets you can access at any time (like savings accounts and short-term CDs), growth assets (like mutual funds) and safe assets (longer-term CDs and possibly annuities).
Having said that, it’s also important to diversify your assets within each category. So, although target date funds have their advantages, putting 100% of your holdings in a single fund may be overdoing it. Anytime you’re putting all your eggs in one basket, it’s not a great solution.
When looking for ways to diversify your target date funds, consider diversifying your providers. Target date funds look different with each provider, for example Vanguard, Fidelity and T. Rowe Price. They are made up of different percentages of equities, and some are actively managed while others are entirely index funds. If you have the option, I recommend investing in target date funds for the same year from different providers.
Another simple way to diversify is to choose different years for your target date funds, for example 2045 and 2050. Theoretically, the 2050 target date fund would have higher risk. That means you would get better rewards during good years on Wall Street. You would also get a bigger sting during a bad year.
Fees
Investors should be looking at a target date fund’s prospectus and cost. You can go to a website like FINRA, plug in a fund and find out important information that’s easy to digest. I am very fee sensitive, so I like to look at the internal cost. There is good news on this front: Target date fund fees have been dropping in recent years. As of 2020, the average fee on a $10,000 investment is about $52. That’s compared with $103 in 2009. Is a fund actively managed or is it more passive? If a fund is actively managed, there is a money manager buying and selling equities in that fund. A passive fund will have more index funds and usually carries lower fees.
Risk
Some target date funds take on more risk than others. It’s important to research this to find out the level of risk you are taking on. There are great tools to analyze risk, like Riskalyze or AssetLock. A financial adviser can help by utilizing these tools to research the risk associated with each fund.
Generally, if a target date fund is being managed properly, it will have less risk as you approach the target date. You don’t want to take on more risk than you are comfortable with. That can make investors nervous when there’s a drop on Wall Street, and they end up selling at the wrong time.
Asset Allocation
You may also want to consider what companies and industries the target date fund is invested in. Some socially conscious investors may not want their money going into particular industries, like tobacco, alcohol or ammunition. If this is important to you, do your research on the fund. Dig into the fund’s holdings by doing some online research. You can find out which companies the fund is invested in and can shop around to find a target date fund that aligns with your objectives.
Younger generations are more interested in socially responsible investing, and we may see socially responsible target date funds in the near future.
Final Thoughts for Retirement Savers
If you are the type of investor who wants to “set it and forget it,” target date funds are a simple option you should explore. The bottom line: It’s important you commit to saving for your future. Keep putting money into your retirement accounts during both good times and bad. You won’t regret it.
-
The Cost of Leaving Your Money in a Low-Rate AccountWhy parking your cash in low-yield accounts could be costing you, and smarter alternatives that preserve liquidity while boosting returns.
-
I want to sell our beach house to retire now, but my wife wants to keep it.I want to sell the $610K vacation home and retire now, but my wife envisions a beach retirement in 8 years. We asked financial advisers to weigh in.
-
How to Add a Pet Trust to Your Estate PlanAdding a pet trust to your estate plan can ensure your pets are properly looked after when you're no longer able to care for them. This is how to go about it.
-
How to Add a Pet Trust to Your Estate Plan: Don't Leave Your Best Friend to Chance
Adding a pet trust to your estate plan can ensure your pets are properly looked after when you're no longer able to care for them. This is how to go about it.
-
Want to Avoid Leaving Chaos in Your Wake? Don't Leave Behind an Outdated Estate PlanAn outdated or incomplete estate plan could cause confusion for those handling your affairs at a difficult time. This guide highlights what to update and when.
-
I'm a Financial Adviser: This Is Why I Became an Advocate for Fee-Only Financial AdviceCan financial advisers who earn commissions on product sales give clients the best advice? For one professional, changing track was the clear choice.
-
I Met With 100-Plus Advisers to Develop This Road Map for Adopting AIFor financial advisers eager to embrace AI but unsure where to start, this road map will help you integrate the right tools and safeguards into your work.
-
The Referral Revolution: How to Grow Your Business With TrustYou can attract ideal clients by focusing on value and leveraging your current relationships to create a referral-based practice.
-
This Is How You Can Land a Job You'll Love"Work How You Are Wired" leads job seekers on a journey of self-discovery that could help them snag the job of their dreams.
-
65 or Older? Cut Your Tax Bill Before the Clock Runs OutThanks to the OBBBA, you may be able to trim your tax bill by as much as $14,000. But you'll need to act soon, as not all of the provisions are permanent.
-
The Key to a Successful Transition When Selling Your Business: Start the Process Sooner Than You Think You Need ToWay before selling your business, you can align tax strategy, estate planning, family priorities and investment decisions to create flexibility.
