There are many investment options out there for retirement plan participants, making your asset selection process time-consuming and confusing. However, one type of investment that has been gaining popularity over the past few years is target-date funds or TDFs. You might be asking, what exactly are target-date funds? Target-date funds are a mix of assets based on an individual’s number of years until retirement, also known as the target date. Fund managers will choose the investments and automatically reallocate your portfolio to become more conservative as your target date approaches.
Although there are many supporters of this fund, it’s important to remember that there is no one-size-fits-all approach to investing. Before you join the bandwagon of target-date fund enthusiasts, make sure you understand the factors that come into play when using this type of investment. The more you know about target-date funds, the easier it will be to determine if they are right for you.
Here are some advantages to using target-date funds:
Here are some disadvantages to using target-date funds:
Know the difference between allocation models that offer “through” funds and models that offer “to” funds:
If you do decide to use target-date funds in your retirement portfolio, you must understand that the funds will not do all of the work for you. You might discover that your assets are not as conservative as you thought as you get closer to retirement. Therefore, although target-date funds provide ease for more hands-off investors, investors still need to research the conservative path of a target-date fund to know whether it fits their own conservative strategy. To help you determine your ideal allocation mix, consider taking an asset allocation test or using online calculators.
There is no such thing as a perfect, one-size-fits-all investment. Retirement saving doesn’t come easy, even with options that are known to be effortless and simple. With a little bit of education and involvement, you will be able to determine if certain investments, such as target-date funds, are right for you.