By Benjamin Brandt, CFP®
If you were anything like me, you spent WAY too much of your childhood watching TV infomercials. Sure, we all wanted a Bass-O-Matic and loved Hair in a Can, but the catch phrase that always stuck with me was “Set it and forget it!” Made famous by Ron Popeill, that catchphrase has stood the test of time, even beyond his famous chicken rotisserie. In fact, that catchphrase makes frequent appearances in my office as I visit with my clients about the value of target date funds during the accumulation phase of saving for retirement.
Never heard of target date funds? There is an increasing chance that you will as time goes by. Target date funds are gaining in popularity; a little over 50% of people now have target-date funds in their portfolios, but that number is projected to reach 70% in just 3 years. Their popularity is due to the ease of their design. However, target-date funds may not be right for everyone.
What is a target-date fund?
Before we get into who target-date funds work best for, let’s define what a target date fund actually is. Target date funds have also been called life cycle funds. A target-date fund takes into account your target retirement date (2030 for example) and adjusts your asset allocation accordingly, hence the name, target-date fund.
When a person is younger and just beginning to save for retirement, ideally they will have a larger portion of their portfolio invested in stocks and less in bonds, but as they approach retirement, it is better to shift to a more conservative asset allocation. A target date fund automatically does this for you. As you get closer to your target retirement date, a target date fund gradually shifts away from a stock-heavy portfolio to a more balanced portfolio.
Target date funds are so easy to use - you can set it and forget it!
The ease of use of target date funds is clear. They allow you to set your target and walk away and forget it. Like that old 90’s chicken rotisserie infomercial, set it and forget it!
The beauty of target date funds is that you don’t have to worry about keeping track of your asset allocation as you age. You also don’t have to worry about stale funds, replacements, or cheaper share classes. All of these things are taken care of for you with a target-date fund.
This convenience has led target date funds to become the preferred investment vehicle for 401K savers and there are now over $1 trillion in assets in these funds.
Are target date funds ideal for everyone?
Target date funds are simple and easy to use, however, they are not made for everyone. They are ideal for accumulating assets as you approach retirement, but what about after retirement? Once you retire, target date funds may not be the best choice.
During the distribution phase of your retirement, you might not want to sell equally out of every area of your portfolio, the way a target date fund would. In retirement, you may want to liquidate only from the income side of your portfolio, especially during particularly difficult times on the stock market.
If you are in the accumulation stage of saving for retirement a target date fund can be a great vehicle to help you set your goal and forget it. However, once you finally hang up your hat and retire, you may want to take a bit more control than the target date fund allows.
About the author: Benjamin Brandt, CFP®
Benjamin Brandt is a CERTIFIED FINANCIAL PLANNER™ and Founder/President of Capital City Wealth Management, a wealth management company exclusively serving retired clients. Benjamin is also the host of the popular retirement podcast Retirement Starts Today.
Benjamin is a combat veteran having served in the North Dakota Army National Guard for 8 years, including a 15 month deployment to Iraq in 2003.
In his free time, Benjamin and his wife Kristen can be found on the weekends at the hockey rink or on the gymnastic mats chasing their six energetic children.
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