Navigating Your Financial Future: The Power of Target Date Retirement Funds

In recent years an investment vehicle called a target date retirement fund has

become increasingly popular in employer-sponsored retirement plans such as 401k and 403b plans. If you're not familiar with what a target date retirement fund is, have you ever seen an investment that has a number in the name, such as ABC fund 2025 or ABC fund 2050? If you have, then you've crossed paths with a target date retirement fund.

So, what are they and how do they work?  Well, a target date retirement fund is essentially a mutual fund that automatically adjusts their asset allocation and level of risk as the investor gets older and closer to retirement age. Take a look at this chart. It illustrates what is commonly referred to as a glide path. As you can see, when an investor is many years away from retirement, their portfolio will generally have more risky stock investments; and as they progress closer toward retirement the fund automatically reduces the amount of stock exposure and increases the allocation to bonds which reduces overall risk. The date, such as 2025 refers to the year in which the investor will turn 65, which is typically the age used as a proxy for retirements. For example, assuming that you're 35 years of age, and we're currently in 2024, you would generally select the 2055 fund as 2055 is when you would reach age 65. Target date funds were originally created to allow investors to utilize a more passive and autopilot investment option. In other words, an investment option that the investor could select once and essentially set it and forget it, ultimately aiming for it to be relevant and appropriate for the age and stage of life that the investor is currently in.

So, are target date funds a good investment? Well, for most investors with smaller accounts who don't really want to be involved in the day-to-day management of their investments, yes, target date funds generally do a pretty good job, and typically do better than most people would do on their own, especially for those who don’t have much of an interest in managing and researching these things themselves. However, it is important to note that there are several disadvantages to investing in target date retirement funds. I'm going to address those in a separate video, specifically the reasons why employing target date funds when entering retirement is not an ideal investment strategy, so be sure to watch that video as well. Please leave some comments below and feel free to call our office if you have any investment-related questions. We would love the opportunity to serve you. Thanks for watching.