Target Date Funds get a bad rap

Many investment advisors will tell you that TDFs are generic, unsophisticated, one-size-fits-all choices. The choice of those without other choices. And while TDFs are not, actually, for everyone, we took a look at this article from Vanguard that reviews what a TDF is and why it works for people who need a hands-off option for some of their invested assets.

A fund of funds

Each Target Retirement Fund invests in several other funds to create a broadly diversified mix of stocks, bonds, and, in some cases, short-term reserves. The year in a Target Retirement Fund’s name is its target date, the year in which the investor in the fund will retire and leave the workforce. 

A self-adjusting mix

Your fund manager gradually adjusts the investment mix to be more conservative as your target date approaches. See this infographic from the Vanguard:

Choosing a Target Retirement Fund

Consider the Target Retirement Fund with the target date closest to the year you plan to retire. If you haven’t planned that far ahead, you can use the year you’ll reach your full Social Security retirement age (65 to 67, depending on when you were born). Once you review that fund’s mix of stocks and bonds, you could choose a fund with a later target date if you’d prefer a more aggressive investment mix. On the other hand, if you’d prefer a more conservative mix, you could choose a fund with an earlier target date. 

Because your personal situation could change over time, consider reviewing your asset mix from time to time to make sure your portfolio matches your goals and risk tolerance. 

The target date is not the end

Nothing special happens with a Target Retirement Fund when it reaches its target date. The fund doesn’t stop investing, and you don’t need to take your money out of the fund. The gradual move from stocks to bonds simply continues. Target Retirement Funds are designed to keep your money invested appropriately throughout your retirement years. 

All investing is subject to risk. Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments (stocks) to more conservative ones (bonds and short-term reserves) based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date. Diversification does not ensure a profit or protect against a loss in a declining market. Investments in bond funds are subject to interest rate, credit, and inflation risk.