A Do-It-Yourself Approach to Target Date Retirement Investing

by Ben Branch

A Do It Yourself Approach To Target Date Retirement Investing Splash image

Advertised as a one-stop shopping, automatic-pilot retirement vehicle, life cycle or target date mutual funds have become increasingly popular. These funds are aimed at individuals seeking an all-in-one retirement fund to invest his or her retirement nest egg, with a target date whose termination date approximates the date of his or her projected retirement (e.g., 2040).

The target date fund has the twin objectives of achieving an attractive rate of return, while managing the risks for a cohort of investors who will be retiring on or about the fund’s target termination date. As the fund holder’s projected retirement date approaches, the fund manager’s number one job is to maintain a stable value. Over the life of the fund, the objective is to earn an attractive return.

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One’s retirement income depends heavily upon what their retirement nest egg is worth when one retires. An ever-fluctuating market causes an ordinary stock mutual fund’s value to move around, often by large increments. Such a fund’s value could be up—or, more problematically, down substantially—on an individual’s target retirement date. No one wants to see their nest egg’s value sink dramatically in the last few years of their working life. An ordinary stock fund is, however, all too likely to lose substantial value in a bear market. And bear markets, which by definition see the market fall by 20% or more, are almost always unexpected.

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