What is an age based target fund?
Target-date funds are designed to age with you by automatically rebalancing your portfolio from growth investments toward more conservative ones as retirement nears. By Kevin Voigt.
A target-date fund is a mutual fund (or exchange-traded fund) that gradually rebalances and reallocates assets as you get closer to retirement, typically shifting the majority of assets from riskier investments such as stocks to more conservative investments such as bonds and cash.
These funds are also a great choice for the beginner investor. A young person just entering the working world may find that a fund like this is the ideal way to start investing. They can always go back later and move things around once they learn the investing ropes. Age-based funds are also highly diversified.
An age-based investment is just that — it's based on the age of your child. You simply choose the Investment Track: Conservative, Moderate, Aggressive or Index. Then, we will use the track you select and your child's age to determine how to invest your assets.
For example, a younger worker hoping to retire in 2065 would choose a target-date 2065 fund, while an older worker hoping to retire in 2025 would choose a target-date 2025 fund. These funds mitigate the need for other assets.
Target date funds (TDFs) mix several different types of stocks, bonds and other investments in a single solution to help you prepare for retirement. They take more investment risks when you're young and gradually get more conservative as you near retirement.
Index funds typically offer lower costs, broad market exposure, and simplicity, while target-date funds are a hands-off, all-in-one investment vehicle. Factors to consider when choosing between target-date and index funds include your investment goals, risk tolerance, and time horizon.
Yes, you can withdraw your money at any time. However, if you retire early (before age 59 1/2), you may be subject to a tax penalty for early withdrawal. Who manages the target date funds? State Street Global Advisors (SSGA) manages the funds.
Generally, a "to retirement" target-date fund will reach its most conservative asset allocation on the date of the fund's name. After that date, the allocation of the fund typically does not change throughout retirement.
Lack of historical track record
The lack of a historical track record put TMFs at a disadvantage. Even though they offer better returns than most other bonds, there is no performance history that could indicate what it has done in the past or how consistent it has been.
Should a 70 year old be in the stock market?
The general rule is that the younger you are, the more risk you're able to tolerate. The older you get, though, means you must cut back on the amount of risk in your portfolio. The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age.
The rule of 70 is used to determine the number of years it takes for a variable to double by dividing the number 70 by the variable's growth rate. The rule of 70 is generally used to determine how long it would take for an investment to double given the annual rate of return.
With this rule, you subtract your age from 100 to find your allocation to stock funds. For example, a 30-year-old would put 70 percent of a 401(k) in stocks. Naturally, this rule moves the 401(k) to become less risky as you approach retirement.
Think About Diversifying Your Portfolio
Instead of keeping all of your cash in a target-date fund, Albertynas recommends spreading your money around. “On considering alternatives, 401(k) plan holders can look into index funds, which track segments of the market, or individual stocks.
You should generally choose a fund whose date most closely aligns with the year you plan to retire or start using the money. Glide path. Even target date funds for the same year can have vastly different glide paths. Make sure you're comfortable with a fund's proposed glide path and methodology before you invest.
They provide an element of inexpensive, quite reasonable investment advice for people who might not otherwise be able to afford it and might otherwise be making kooky choices. And most important of all, they have delivered positive outcomes for investors who own them.
Despite their simplicity, investors who use target-date funds need to stay on top of asset allocation, fees, and investment risk.
Target-date funds are designed to age with you by automatically rebalancing your portfolio from growth investments toward more conservative ones as retirement nears.
A target date series is made up of several target date mutual funds issued by the same firm that are divided into 5-year vintages (e.g., 2025, 2030, 2035, etc.) with an investor selecting the vintage that is closest to the year they plan to retire or need the money.
A target-date fund is generally a "fund of funds," meaning that the investor is paying an extra layer of fees. Those additional fees could make the fund's actual return compare unfavorably to other options for a retirement portfolio, such as an S&P 500 Index Fund.
What is the average fee for target-date funds?
The average fund has an expense ratio of 0.51%. 3 That means your $10,000 investment will cost you $51.00 per year just for the service the target-date fund offers. That might not seem like much, but the fees add up over time.
If you plan to retire in, say, 2060, you would pick out a fund closest to 2060. The fund would then choose a combination of stocks and bonds that allow you to take on the largest amount of risk early on. For example, this may look like a portfolio of 90% stocks, or equities, and 10% bonds, or fixed income.
More from Personal Finance:
That means funds — even those with the same target year — may have stock and bond holdings that aren't well aligned with an investor's financial plan. In other words, they might be too risky or too conservative.
Target-date funds can take much of the guesswork out of retirement planning. But fund holdings are sometimes too conservative for younger investors. While passively managed target-date funds usually have reasonable pricing, actively managed ones can be expensive.
Index funds offer more choices and lower costs, while a target-date fund is an easy way to invest for retirement without worrying about asset allocations. Index funds include passively-managed exchange-traded funds (ETFs) and mutual funds that track specific indexes.
