Are Target Date Funds Good for You
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Choosing the right investments for your retirement can seem overwhelming. The choices feel like they are endless. Then you see it: the fund with your retirement year right in the name of it. Could this be the remedy to your dilemma? Ahead of jumping in to this miracle investment, let us take a look at the benefits and drawbacks of this fund. 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 Pros of a Target Date Fund Stress Free - You select the approximate year you want to retire and you are done! It is a set it and forget it approach to investing. Saves time - obviously if you only need to select your year, then you don't have to spend as much time working on your investments. Cons of a Target Date Fund Risk preference may be different than you would select - The fund may end up taking on much more risk than you would consider taking with your money (or possibly less risk). Not old enough- Target Date funds were created in 1993. While may seem like a long time, when you take into consideration that if you start saving for retirement when you first start working that you will have about forty years to save for retirement the target date funds are really not that old. It is hard to judge a product that has not taken gone through and entire investment cycle. Expenses can be High -Fees harm your investments. There are two different fees that come into play with target date funds. The first is the expense ratio for the fund itself. The second is the expense ratio for the underlying funds. As a result, you could be paying more in costs than is good for your bottom line. I have seen some funds go as high as 2% and up, you just simply cannot win with this amount of fees. Only as Good as the Investment Company -Most target date funds use funds from their own company to create your portfolio. Thus if you use the Fidelity fund it will use their own Fidelity funds. This means that your fund is only as good as the company that is managing it. It is very important to ensure the family of funds has a strong history of good performance in their funds. It is decision time - are you going to take that target date fund in your portfolio? Remember that whatever you decide the most important thing to remember is to be investing!