Do Target-Date Funds Hit the Mark for You?
Wouldn’t you love a pair of jeans that fit you perfectly when you were 25, then 40, and even when you were 62? That’s the premise behind what – up until 2008 – was conceptually, at least, a great idea for average investors: target-date funds.
Introduced in the early to mid-90s, target-date funds are, as U.S. News aptly named them, the cruise control of retirement investing. By definition, a target fund is a diversified mutual fund that handles asset allocation and rebalancing for you. You set a “target” retirement date, and as you get closer to it, your investments are re-balanced for lower risk instruments. For example, it automatically increases your stake in bonds – toning down your risk – as it nears the target date.
Sound perfect? In 2008, about 7.3 million people held target-date funds, and we all know what happened in 2008. Recession notwithstanding, some of the funds were still heavily weighted with equities even though their target date was approaching – and those funds’ owners suffered substantial losses.
That’s the bad news. The good news is that event triggered a closer scrutiny of these funds – the risk, the fees, and the disclosures. So, while they’re not perfect, target-date funds remain popular, with $45 billion in new cash* invested in them in 2009.
So – do target-date funds hit the mark for you? The answer is, maybe. But you need to carefully consider what target date you actually want – is it two years before you officially retire? Or maybe five years after? And what should you do if your fund manager retires? If you have additional investments, how does this fund complement – or replicate – your other investments?
In short, target-date funds could be an effective component of your retirement portfolio. But you may want someone you trust to help you find out.
Let’s talk.
John Karas
President & CEO
johnkaras@riverviewbank.com
(360) 693-7442