If you don’t really want to pay much attention to your retirement savings (both before and during your retirement years), then Target Retirement Date Funds might be a great choice for you.
Disclaimer: We are not financial professionals, and this article is intended only to educate and inspire, not to provide specific advice about your specific personal financial situation (so don’t call the lawyers).
Part 9 of “How to Invest – Safely and Smartly – During the Retirement Years”
If you want to gamble with your nest egg or get a thrill from constantly trading individual stocks, this article is NOT for you. If, however, you’re a stable, “boring” retirement investor, or maybe you’re scared or overwhelmed with investing, then read on!
What is a Target Retirement Date Fund?
First of all, what is a “Target Retirement Date” mutual fund? For that matter, what the hell’s a “mutual fund”?
A mutual fund is an investment vehicle or portfolio (think, a basket) containing multiple investments, like stocks, bonds, cash products, etc. (think, eggs).
A Target Retirement Date mutual fund is one that shifts its investments over time in accordance with a person’s retirement cycle. For example, a Target Retirement Date fund with a date of 2040 would have a different set of investments in it today than it will have in 2039, when its investors are just 1 year away from retirement. Likewise, it will have a different set of investments in 2050, when its investors will already be 10 years into their retirement.
Why are Target Retirement Date Funds Worth Considering?
Target Retirement Date funds are simple. They require little, if any, attention. They have a professionally managed strategy. And, they tend to cost you less.
One Fund, and Done!
One investment. It doesn’t get any simpler than that.
But why is one investment enough? Because these are mutual funds with the specific goal of meeting a person’s retirement savings and withdrawal needs, they usually contain a sensible mix of asset classes (stocks, bonds, cash; domestic and international) in the right proportions at any given time. Diversification is built in, which is good because it helps reduce or manage the inherent risks associated with investing. You don’t need to buy a bunch of stocks or bonds or anything to be diversified; these funds have done it for you.
Get it, and Forget it!
By design, Target Retirement Date funds change their holdings over time. This is the “Date” in “Target Retirement Date” fund. The fund’s name usually includes a year (such as, “Acme Firm’s Date-o-Retirement 2040” fund). This target year is the approximate date when the fund’s investors anticipate retiring. This year is what the fund pivots around.
So, using the Date-o-Retirement 2040 fund as an example: Changes in the fund’s investments will be made depending on whether it is 10 years before 2040, currently 2040, or 10 years after 2040. Such changes are necessary in order to accommodate the investors’ different needs over time (pre-retirement savings period; just retired; deep into retirement and looking to not outlive their savings). These funds are designed this way so that you don’t have think about it, ever. Nice and easy.
Target Retirement Date funds are professionally managed, meaning that some financial nerd(s) have come up with a strategy for the fund, such as which investments to hold, in what proportion, and why; how much risk the fund will have, how that risk level will change over time; and, how the fund’s holdings will change as the target date approaches, is reached, and then exceeded. Professionals plan these funds with a certain investment philosophy in mind. Preferably you want a fund that shares a similar investment philosophy as you.
To find out the general investment philosophy of any Target Retirement Date funds, research the fund’s documentation (prospectus, fund description on the firm’s website, etc.), as well as the firm’s general investment approach.
Unsurprisingly, funds with (active) professional managers will cost you. However, Target Retirement Date funds tend to buck this trend (but not always). This is, in part, because once these managers create the strategy (active), they have a road map that allows them to take a more passive management role as they implement the plan.
(Often, But Not Always) Lower Cost
Finally, cost. Be sure to shop around with an eagle eye toward the fund’s “Expense Ratio” (aka, the cost) . For example, if you are interested in two similar funds from two different firms, and one has an Expense Ratio of 1.5% and the other is 0.15%, you obviously want to add “lower cost” to the list of pros for the second one. Don’t forget: cost will kill your returns! Try to keep them low!
What Happens When I Reach Retirement Age?
When an investor in one of these funds reaches retirement age, the fund adjusts to meet the needs of a retiree, such as regular income generation and lower risk.
Similarly, Retirement Income mutual funds are for people who are in retirement. In fact, Target Retirement Date funds often “turn into,” or investors get “moved into,” Retirement Income funds. As the name suggests, they focus on regular income generation and have conservative risk profiles.
So get out there and be a lazy – I mean, an efficient – retirement investor! Consider a Target Retirement Date fund for your 401k, IRA, etc. And, don’t forget that there are certain retirement accounts (such as Roth IRAs) that your aging parent(s) can still contribute to, even if they are mostly retired, so long as they have earned income (for more info, see this IRS article).
–Good luck, we’re all gonna need it!