Podcast Episode 321: Should I Use Target Date Funds?
Most people are familiar with target date funds, although they might not necessarily know them by that name. Your 401k plan might have a different name for it like a lifecycle fund, but regardless of what it’s called, it continues to be a popular investment choice. Let’s talk today about whether target date funds are a good way to invest for retirement.
The evolution of these funds actually come from the 529 plans people use for college. They wanted to dissuade people from day-trading and making a bunch of changes to their kid’s fund so they put limits on the amount of changes you could make each year. That eventually turned into a target date fund so that the investments and risk would change as you got closer to when you expected to need the money.
With so many different mutual funds and sectors to sort through, the simplicity of these funds is what drives many people to using them. For people that are earlier in their working career, they might make more sense because you’ll get more exposure to the stock market and that likely aligns with your goals.
Someone closer to retirement would like get more bond exposure from these funds, which could be fine, but it assumes everyone at age 62 would invest in the same manner.
We all have different goals and circumstances, and target date funds can’t differentiate that. That’s why, while not a bad option for many people, target date funds won’t give you an investment mix that truly aligns with your goals and needs.
As with any area of planning, our Money Map review process can help you get the conversation started and give you the confidence you need to protect yourself and your family.
Here’s what you can expect to learn in this episode:
• How target date funds were first created.
• The effectiveness of these funds for someone in their 20s versus someone in their 50s.
• An example of a time where we found target date funds weren’t what someone needed in their retirement plan.
• Why most people aren’t paying close attention to the performance of their target date funds.
