Target Date Funds continue to grow in popularity due to their ease of use. All the investor has to do is to pick the date of their projected retirement date, invest their money in that retirement date fund and the professional money manager will do the rest. While a great improvement for the individual investor there are still some additional considerations that should be factored in. If you have the inclination you can also manage your own retirement funds and possibly improve your investment returns.
Risk Level: Different Target Date Funds allocate a higher asset to stock selection for the same retirement date. In addition, individual investors have different risk tolerances. If the target date fund is invested 80% in stocks, you have to be prepared to watch your target date fund decline 30% or more as we saw during the last two stock crashes of 2000 and 2008.
Costs: Some Target Date Funds use Mutual Funds as opposed to Index Funds. Mutual Funds carry a higher fee structure which can be a real drag on performance if they’re not overcome.
Retirement Goals: While picking the Target Date Retirement date fund that matches your retirement date is easy, it’s not always the right choice. You have to take into consideration your tolerance for risk and where you are in your retirement goals.
Asset allocation can determine about 90% of a funds return. Notice the Target Date Retirement Funds that had the highest percentage of stock holdings did better over the last 5 and 10 years due to the strong stock market. The amount of risk being taken can quickly be seen by the losses suffered in the stock market for 2008. While 2008 was extreme, you’re likely to encounter that again in your lifetime. Ask yourself if you can handle that kind of risk. When deciding which target date fund to invest in, you need to incorporate your how much risk you’re comfortable taking on (equities – stocks) and where you are in your retirement savings goals.
Current performance and expense ratios for target date funds can be found by visiting their website. Please be sure to read the fund’s prospectus prior to investing any money in a fund.