Jun 8, 2022
What is a target date retirement fund? If you are invested in a 401k, you are likely invested in a target date retirement fund as well. On this episode, I’ll dive into the four things you need to know about target date funds, including what they are and how they can help you save for retirement.
You will want to hear this episode if you are interested in...
- What is a target date fund and why am I invested in it? [1:12]
- Comparing target date funds [4:03]
- How do target date funds work and should I invest in them? [6:55]
- The pitfalls of target date funds [9:22]
Identifying target date funds
In 2006, the Pension Protection Act was signed into law with the hope that it would bolster retirement plan design and the number of people saving for it. This required 401k providers to adopt automatic enrollment features and have default investment funds other than a money market account. Thus, target date funds became the new default and many people became invested in them without realizing it. This is also true for the employees of companies who change 401k providers. Most people are unaware of what their default investment fund is if they don’t specifically look into it.
However, it’s easy to spot target date funds in your portfolio. These mutual funds are easily identifiable because they have a year in the name, such as the Vanguard 2035 Fund. The year corresponds to the year you expect to retire, often when you turn 65. These funds use a preset mix of stocks, bonds, and cash so that investors don’t have to put much thought into who they are investing in. The companies that put together target date funds try to build the best portfolio for someone at their expected retirement age.
Compare and contrast
By design, target date funds start out as an aggressive investment that gets more conservative the closer you get to retirement. This benefits investors who don’t want to keep a close eye on their portfolio as they get ready to begin their third act. Upon reaching retirement age, the fund will remain mostly static, with no more than 50% invested in stocks. When deciding which target date fund to invest in, the first thing you should determine is your asset allocation. This is the percentage you are invested in high risk/high reward investments like stocks, real estate, and commodities versus safer, low-yield investments like bonds and cash.
Once you determine your desired allocation, it’s time to pick a target date fund! The key here is research. Look into either the fund you are currently invested in or the other options available to you to see which one is closest to your ideal asset allocation. Additionally, you should rebalance your allocations to make sure you aren’t taking a loss or leaving money on the table. Listen to this episode for more information on target date funds!
Resources Mentioned
- The 5 Step Portfolio Process, #17
- Vanguard Target Retirement 2035 Fund (VTTHX)
- Fidelity Freedom 2035 Fund (FFTHX)
- American Funds 2035 Target Date Retirement Fund (AAFTX)
- BlackRock LifePath Index 2035 Fund (LIJAX)