How Do Target-Date Retirement Funds Work?

If you are saving for retirement (which you ought to be), you should be familiar with the term “Target-Date Funds”. If not, don’t worry. The financial professionals at American Investment Planners, LLC are here to tell you everything you need to know…

What is a target-date fund?

A target-date fund – also known as life-cycle fund or age-based fund – is a hybrid mutual fund that automatically reallocates its asset mix as the target date approaches.

How do target-date funds work?

When you open a target-date fund, you must designate your anticipated year of retirement: for example, 2020 or 2055. As time progresses and your retirement draws nearer, your portfolio manager will adjust the asset mix to reflect your changing needs.

For example, you are a young worker that plans to retire in 2050. The 2050 target-date fund will be heavily weighted towards stocks, with a small percentage of the portfolio dedicated to bonds and cash equivalents in order to maximize growth potential. As your retirement date approaches, a higher percentage of your asset mix will be shifted towards bonds and cash equivalents in order to reduce risk and volatility.

Do target-date funds have a place in my portfolio?

Target-date funds take the responsibility of rebalancing off the investor, which can be a double-edged sword. This hands-off approach is appealing to many, however others may not be satisfied with the management of their portfolio. For example, your portfolio manager may not readjust your asset mix frequently enough, or they may be too aggressive with their investments as you approach retirement. In the end, they are a good retirement planning tool, but results are far from guaranteed.

If you want to learn more about target-date funds, or retirement planning in general, our financial consultants are here to help. To schedule an appointment with one of our advisors, please call (516) 932-5130 or email info@americaninvestmentplanners.com.