How to Use Target Date Funds as a Retirement Strategy
10/27/2017 5:00 am EST
Set it and forget it. That’s the appeal of target-date funds, which promise a portfolio of U.S. and foreign stocks and bonds in a single fund, explains Richard Moroney, editor of Dow Theory Forecasts.
Geared toward investors saving for retirement, the funds gradually shift assets from stocks to bonds as the target date approaches, which is roughly when an investor expects to leave the work force.
Thus, the funds become more conservative as the investor nears retirement. The average target-date 2050 fund (designed for investors retiring in 30 to 35 years) is more than 80% invested in stocks, with the rest in bonds.
In contrast, the typical 2030 fund (10 to 15 years to retirement) is about 65% in stocks and 35% in bonds. In general, funds aim to hold 40% to 50% in stocks by their target date.
After that, some funds continue to trim stock exposure, while others maintain a fixed allocation. Investors can hold a fund past its target date.
For many investors, disciplined and ongoing rebalancing is easier said than done. Target-date funds automatically rebalance to maintain an appropriate asset allocation.
The funds also offer broad diversification. Consider the popular Vanguard Target Retirement 2030 Fund (VTHRX), which invests in four index funds holding more than 22,000 U.S and international securities.
To be sure, the one-size-fits-all approach of target-date funds may not fit your objectives and risk tolerance. And investors willing to roll up their sleeves may generate better returns.
Still, the funds make sense for longterm investors who lack the time or interest to manage their savings. If you plan to shop around, focus on low-cost funds.
Check out Vanguard’s offerings. The fund giant oversees 11 target-date funds, including the three largest on the market, charging only 0.14% to 0.16%, compared to the category average of 0.85%.
Finally, similarly dated funds may have significantly different asset allocations, making it difficult to gauge risk and compare performance.