If you’re young and just beginning to plan for retirement, you might be interested in learning more about the unique advantages of a retirement target fund. They can serve those who are older as well, but for better results and a higher yield, it’s best to start early.
Referred to as a target-date fund, a lifecycle fund, dynamic-risk, or age-based fund, this type of fund is, in essence, a portfolio that becomes more conservative as you get older and your much-awaited retirement date comes closer.
As with any investment, there are pros and cons. Let’s take a deeper look at the retirement target fund — an investment that could be a potential powerhouse of your retirement planning strategy.
Get to know the basics
First introduced in the mid-1990s, this kind of investment tool increased in popularity with the passing of the Pension Protection Act of 2006 and the need for qualified default investment alternatives for auto-enrolled 401(k)s.
Target-date accounts offer a mix of mutual funds, stocks, bonds, and other investments that are designed to be riskier — and ideally more revenue-generating — early on. The allocation of your assets simplifies over the years, as your nest egg grows fatter and you approach retirement.
Many people just want to “set it and forget it” when it comes to their investments. These lifecycle funds are perfect for those who just want to have money automatically withdrawn from their paychecks while someone who knows what they’re doing manages the decision-making aspects.
Before you commit
Some financial professionals might say that one of these is all you need for your entire retirement savings plan. But all investments come with some risk, and even these age-based funds can lose money in the long run.
It’s always smart to consult with an experienced wealth advisor before signing any paperwork. People grow and change in different ways, and your goals might shift dramatically from year to year. Perhaps you’ve caught the living-in-a-van bug and now want to retire early and hit the open road, or you’d like to go back to school and explore a whole new career that keeps you engaged past your projected retirement age.
A knowledgeable planner will help you determine if an age-based retirement fund is right for you. It may make more sense for you to diversify your portfolio in other ways that are more appropriate for your personal situation.
Frequently asked questions
What happens to the fund after my target date has passed?
That depends. Before you pledge any money, make sure you study the details of the plan outlined in the prospectus.
Most funds of this kind are considered a “to fund,” which will build up your savings until your retirement date, and then should be cashed out and re-invested. This contrasts with a “through fund,” which will continue to reallocate your investments past your target date automatically and typically hold slightly riskier assets.
How do I know which one to pick?
Doing your due diligence will pay off. If your employer offers automatic enrollment in their 401(k), 403(b), or other retirement schemes, they may simply offer you a choice of three hands-off investment styles: aggressive, moderate, or conservative.
Once you select which option seems like the right fit for you, the idea is that you don’t have to worry about it again until they’re asking what kind of cake you would like at your retirement party.
However, we’re living in unpredictable times, and it just doesn’t make sense to leave your life savings hanging out unsupervised. While there are some fees involved, working with a pro is a better approach that is likely to result in a much more satisfying return.
What if I’m approaching retirement age already?
It’s never too late to craft a plan that will hopefully have you sitting pretty when it’s time to stop working and live the good life. But the earlier you begin, the bigger your balance will be.
If you’ve reached the age of 50, then the IRS allows you to make tax-advantaged “catch-up contributions” to your retirement funds to give you a much-needed boost. It’s also probably not a bad idea to implement some crucial money-saving strategies that can put a surprising amount of cash back into your pocket for retirement.
There might be a lot of jokes about penny-pinching out there, but you’ll be the one laughing when you’re enjoying a cold beer and great fishing while they’re still at work.
What about fees?
Utilizing the services of a skillful financial advisor isn’t free, but it will almost definitely save you money in certain circumstances. Many target-date funds come loaded with fees that you can avoid by taking advantage of your retirement planner’s expertise.
Some common fund fees include:
- Brokerage charges
- Annual operating expenses
- Front-end and back-end loads
- Closure costs
The Financial Industry Regulatory Authority (FINRA) is a non-profit organization dedicated to ensuring fair market practices for everyone, and it has a very handy fund analysis tool that will help you compare the costs of various funds and evaluate their value for your needs.
The Bottom Line
Planning for your retirement, especially if you’re still young, can seem like a daunting task or even an unnecessary drag. But it’s vitally important to start saving now. If you have questions or are feeling overwhelmed, we can help.
At Sustainable Retirement Income, there’s no one-size-fits-all strategy — every one of our clients receives personalized service that’s specific to their financial goals and needs. We offer a wide range of tools to help you invest wisely, grow your assets, manage philanthropic giving, and enjoy a more than comfortable retirement. Let’s start a conversation today!