What is a Target Date Fund? The Essential Pros and Cons

According to some research, 49% of adults who were between the ages of 55 and 66 had no retirement savings. If you don’t want to be stuck in that situation, you should look into different retirement plans as soon as possible.

One option to help you grow a lot of money quickly is a target-date fund. But what is a target-date fund?

Keep reading to learn all you need to know about how to quickly grow your retirement savings.

What Is a Target-Date Fund?

A target-date fund is also known as the life cycle fund. They give you the right balance between having risk to grow your wealth, and also a safe bet to help you protect your investments.

The fund rebalances your portfolio by giving you a good diversification of stocks and bonds. These mutual funds buy from other mutual funds to give you a great, diverse portfolio. You can set and forget this fund, and check it years later to see how much it’s grown. 

It’s best to start one of these as young as possible, and you’ll have a good amount of money when you retire. They grow by using a larger slice of your portfolio than stocks. These are also better than fixed-income investments because bonds normally give you smaller returns, which will make saving for retirement hard. 

Your retirement year acts as the target date for the investment. The funds will correspond with your planned retirement year. You will just need a provider who can provide a target date close to when you’re aiming to retire.

Pros and Cons of a Target Date Fund

Target funds are great because they offer a solution to people who don’t want to deal with learning about the stock market and potentially risking all of their money.

You can have a hands-off approach to investing, and you won’t need to balance your investments are your own. They’re more comprehensive, and you don’t really have to worry about the past performance of the stocks when you pick them. 

There are still some disadvantages to these target funds, however. They’re not personalized for every person, and you’ll be treated the same as any person who retires that year. 

However, you can still tailor this to suit your lifestyle, resources, and needs for retirement. Target-date funds can’t give you an individualized income plan, but you can manage the money on your own once you have it. 

Another disadvantage is that many people aren’t doing their research well when they’re picking a target-date fund. This is important so that you know that your funds are being managed properly and making you the most money. 

Target-date funds can’t be a standalone retirement plan. Instead, they work best when paired with a Roth IRA or a 401(k).

How These Plans Work

So how do these plans end up actually making you money? One thing that’s important to look at is the glide path. This is how the funds will go from high risk equity funds to safer investments. 

The glide path will land somewhere in the middle so that your investments are protected. For example, your fund may have a mix of global and domestic funds to make up the whole investment. 

It can change towards the end of your retirement to make up a different mix of investments. The providers of these funds will use different strategies and investments to make sure that you have the most money for your final assets before you draw it out. 

There are two main types of target-date funds, one that has the glide path freeze your assets the year you’re going to retire, and then another one that will freeze your assets after your retirement age.

If they do it after retirement, they’re hoping you’ll continue to invest after you retire. You can choose plans that still invest ten, fifteen, or twenty years after you’ve retired. 

How to Pick a Retirement Plan

When you’re ready to pick a retirement plan, there are many different providers who offer them, including Fidelity and Vanguard. When you’re picking one, make sure that you look at the cost and prospectus.

You can find all that information by going to the website FINRA. You’ll be able to look up the fund you’re interested in and read all of the information. The internal cost is important because it will tell you how well the funds and investments are doing. 

You’ll also want to see if the fund is being actively or passively managed. If it’s actively managed, that means that someone is managing the money and buying and selling different things under that fund. 

If it’s passive, there’s normally no one managing it, which means that there won’t be as many fees tacked onto it as well. 

You should also look to see how well a portfolio is diversified. You’ll need to diversify your assets in each category so that you don’t lose all of your money if one market crashes.

To do this, you could even get different target-date funds from different providers. If you’re interested in learning more about how to pick a plan based on diversification, read on here!

Learn More About Target-Date Funds

These are only a few answers to the question, “What is a target-date fund,” but there are many more things you’ll need to consider before investing.

When in doubt, it’s always best to speak with a financial advisor before making any important decisions. 

If you’re interested in more great financial advice, explore our website! We have many more great articles that will help you manage your money wisely.