Taking Aim at Your Retirement: A Look at Target Date Mutual Funds
by John Markese
There is an appealing simplicity in the concept of target date funds that has a strong attraction for investors: Just pick a year, and lean back—your portfolio management is now on autopilot, with coordinated diversification among the major asset classes that is rebalanced periodically toward your estimated time of arrival, your target date.
But while the concept of the target date fund has a justified appeal to a broad range of investors, making the right choice among the many target date fund offerings and understanding how the funds work is not quite as simple as it appears at first glance.
In this article
- The Risk/Growth Dilemma
- Choosing Among Funds
- What Exactly Is the “Target”?
- Investment Characteristics
- Taking Aim
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The Risk/Growth Dilemma
Target date funds are built on the assumption that investors who are farther from their target retirement date should have higher allocations to stocks, and that the stock commitment should decrease as the target date approaches. Thus, funds with an earlier target date will start out with a lower stock allocation than funds with a later target date, but all of the target funds within a family will decrease their commitment to stocks as the target date approaches.
When the target date arrives, the asset allocations resemble a portfolio suitable for a retirement period that may extend for decades. This terminal target date portfolio will have substantially less risk than a target date fund with 40 years to run before the target date, and it will also have a significant income emphasis rather than the growth emphasis of a distant target date fund.
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