Are Target Date Funds Right For You
Investing your money for retirement can feel like a monumental task, especially when the amount of options seem to be endless and in a foreign language. Then from the corner of your eye you see the fund with a date pretty close to your goal retirement year. Have you found an easy solution that will get you there without all the extra work of learning how to invest? Maybe, but let’s first take a look at the advantages and disadvantages of a target date fund (the official name for that new found light).
What is a Target Date Fund
Target date funds are intended to take the guess work out of retirement planning by determining for you where your money should be invested. They decide how much money goes in the stock market, how much into bonds and how much in cash or other investments. This changes as you get closer to your retirement date.
This happens by the the fund investing in other funds, so it is a fund of funds. Therefore if your asset allocation is supposed to be 80% stocks plus 20% bonds, the fund will determine a stock fund or two and bond funds to create the right mix for your retirement year.
The Advantages of a Target Date Fund
Worry Free – The extent of your learning is simply to do a quick math problem to see what year you are going to retire. No need to learn all those funny investing terms.
Saves time – this moves beyond avoiding learning about investing but includes the time that you would review all the investments available to you, recalculate how much you need in stocks and to reallocate every year.
Disadvantages of a Target Date Fund
May not match your risk preference – They may end up taking on more risk than you would consider safe for your retirement money.
Still Untested – Target Date funds were created in 1993 by BGI and Wells Fargo. While you may consider 19 years a long time, when you consider that as a 21 year old you would have forty four years to save for retirement the target date funds have not existed long enough for a new worker to get to retirement. I believe in long term investing, it is hard to judge a product that in reality has not had the chance to make it for the long term.
High Expenses – Fees can do lots of damage to your investments. Which means that target funds are at a disadvantage because they charge two fees. The first is the fee for the target date fund itself. The second is the fee for the investments in that fund. Due to this double fee, you may be paying more in expenses than is good for your money.
Investment only as Good as Management Company – Most of these funds use funds from their own line up to create your portfolio. So if you use the Vanguard fund then it will contain Vanguard funds. So if your investment company is week then your investment will be weak.
There you have it, the good and the bad of target date funds. Now it is up to you to weigh the pros and cons to make your decision on where you would like to invest your retirement dollars.
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