Target funds could be a smart tool for retirement.
Target funds are relatively recent retirement options.
Started in 1994, they are just 25 years old.
What are they?
These are mutual funds with investments options tied to your projected retirement date.
As you age, they are rebalanced to manage risks as you near retirement.
A recent Kiplinger article asks “Is a Target Date Fund Right for You?”
According to the article, these funds can be beneficial, but they are not for everyone.
What do you need to know about them?
They are good for those who want to manage their own investments, but are not be intimately or actively involved in the details.
The main problem? The investments are not personalized to your situation.
All individuals retiring in the same year are treated the same way.
Your plan should include some individualization, so target funds should not be everything.
What should you consider specifically?
Diversification.
Divide your assets between different classes.
Include growth assets, safe assets, and liquid assets.
Be sure to include all of them in different assets.
Fees.
Target funds have fees.
These are not as much as they used to be.
On average they are about $66 for $10,000 investments.
You should consider whether the funds are passively or actively managed.
Passively managed funds will be lower in fees because a money manager will not be actively selling or purchasing equities.
Risk.
All investments take risk.
Some target funds have higher risks than others.
Take care to understand the amount of risk you are taking.
Asset Allocation.
Look at the target date to align with your goals.
It is good to know the industries and companies associated with the funds.
Target funds will take more active research and involvement upfront.
If you do your homework early, you can simply let them work for you.
My personal recommendation, however, would be to consult with a financial advisor experienced in retirement planning.
Reference: Kiplinger (July 23, 2019) “Is a Target Date Fund Right for You?”
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