A target date fund is a mutual fund that automatically resets the asset mix of stocks, bonds and cash in its portfolio according to a selected date. Fund dates are in five year increments, e.g. 2035, 2040, 2045, 2050, etc., and are meant to be selected around the time you wish to retire. So if you’re planning to retire around the year 2042, you would want to invest in the 2040 or 2045 fund. The latter would just be a bit more aggressive.
Are target date funds right for Millennials?
Target date funds are a fantastic retirement vehicle for everyone, but especially Millennials. The idea of investing can be daunting and overwhelming. The easiest way to overcome that is by simply investing into one simple fund that is truly well diversified. If you’re new to investing or simply not up-to-speed on best practices, you’re not alone. A lot of people are in the same boat!
There are a number of buzzwords associated to investing for retirement; diversification, asset allocation, rebalancing, the list goes on. You want to know how to combat that and streamline the process? Use a target date retirement fund that does all the work for you. And I do mean all the work. All you have to do is invest regularly via dollar-cost averaging.
How do target date funds work?
Target date retirement funds are essentially hybrid mutual funds. They are comprised of a number of other mutual funds to make up one target date fund. Most target date mutual funds are made up of three underlying mutual funds; total US stock market index fund, total international stock market index fund, and a total bond market index fund.
The beauty of these target date funds is how they function. They follow what is known as a “glide path” to determine your asset allocation (your stock to bond ratio). The concept is very simple and straightforward. Typically if an investor is 30+ years from retirement, their respective target date fund will be invested 90% in stocks and 10% in bonds. As you near retirement age your portfolio begins to glide to a slightly more conservative asset allocation and increase your bond exposure and lessen your stocks.
If you prefer to be really aggressive with your investing approach, you can choose an even later target date retirement fund than your anticipated date. For example, if you plan to retire around 2040, you’re not forced to only be in that very fund. If you’re more of a risk-taker you can chose the 2050 target date fund, which just means you’ll be exposed to stocks more as you near retirement compared to the 2040 fund. The same can be said if you’re risk-averse. You can opt for the 2030 or 2035 fund instead for a more conservative portfolio.
Best target date funds providers
My absolute favorite mutual fund company is Vanguard. In my opinion they are the best at putting their clients and investors needs first, e.g. they have the lowest fees which saves you money. They will always be my number one selection as all my investments are with Vanguard. However, that doesn’t mean they’re the other player in town. There are other really good mutual fund companies.
- Vanguard Target Retirement Funds
- T. Rowe Price Target Retirement Funds
- Fidelity Freedom Target Date Funds
An investor can be their own worst enemy
There is some hidden excellence to Target Date Retirement funds as well. I’ve obviously spoken about the features of the one-stop-shop (mutual fund) and how it takes all the research of mastering your portfolio out of the question. Along those lines, the “hidden” piece that most Millennial investors are not taking into consideration is you, the investor.
A target date retirement fund does all the work for you, meaning the investors behavior and desire to work and tweak their portfolio doesn’t exist. When you just keep buying into one, well diversified fund, there is no need to constantly tinker with it, regardless of what is going on in the market. Successful long term investing is about self-control and not making mistakes.