Pros and Cons of a Retirement Target Date Fund: Can You Relax and Glide into Retirement?

A retirement target date fund is a kind of mutual fund that is professionally managed and strategically reallocated over time to achieve both growth and security for your assets. The key goal for a target date fund is that your money will be available for withdrawal on a certain future targeted retirement date and beyond.

So, when you invest in a target date fund, you don’t need to worry about what percentage of your money should be in stocks, bonds or TIPS and how that allocation needs to change over time.  A target date fund automatically manages the allocations — buying, selling and strategy for your money.

Relax! “Glide” into Retirement

One of the key features touted by target date funds is their “glide path.” What this means is that the funds will gradually reduce the percentage of your money that is invested in stocks until some point when that allocation levels off, presumably until the fund holder’s death.

For example, if you were 45 now and bought a target date fund, with a target date of 2037 (the year you turn 65), the fund might be allocated like this:

  • 90% in stocks when you are 45, with the rest in bonds and TIPS
  • Gradual reduction in your exposure to stocks starting at about age 55
  • A “glide” toward only about 50% of your money being invested in stocks at 65
  • A continuation of the glide to be about 30% in stocks when you are 75
  • Holding steady at around 30% stocks, 50% bonds an 20% tips for the remainder of your life

The timing and allocation of the glide path can differ widely among fund families. T. Rowe Price’s keeps changing the portfolio allocations until the fund holder is conceivably in their 80s, others in their mid-60s and still others are earlier or later.

In other words, some target date funds glide “to” retirement and others glide “through” retirement.

Whether you are considering keeping money in a target date fund as a rollover from your 401(k) plan upon retirement or directly investing in a target date fund as part of your retirement strategy, you need to understand the fund’s glide path and if this is appropriate for your situation.

How Does a Target Date Fund Work?

The idea behind a target date fund is to make it easier for the average investor to maintain the right kind of asset allocation for their current age as relative to their target retirement age.

To accomplish these goals, the allocation to equities will generally be reduced over time as that target retirement date gets closer.

Sounds like a good idea and it can be. But target date funds are not simple and there are differences even between two target date funds from different fund families with the same target retirement date.

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