Target Date Funds are a type of mutual fund which could be useful for both new investors and experienced investors alike.
What is a Target Date Fund?
A Target Date Fund asks its investors a simple question—when do you plan on retiring or reaching your goals? Perhaps you might answer, “I’ll retire in 2050.” Thus, a 2050 Target Date Fund might be best for you! That fund would hold assets—like stocks and bonds—in accordance with your planned 2050 retirement date. And it will slowly adjust those allocations as we approach the year 2050.
Right now, the 2050 Target Date Fund would hold mostly stocks. Stocks generally have higher returns over long time periods, and we have 29 years until we retire. But as we approach the year 2050, the 2050 Target Date Fund will slowly begin to adjust its asset allocation towards less risky assets—like bonds. It would make these changes automatically, without any actions from the fund’s investors.
In other words, the fund seeks to allocates its investors’ capital in an appropriate manner to the fund’s “target date.”
What “years” are available for Target Date Funds?
It is most common for fund companies to offer Target Date Funds in five-year increments---2025, 2030, 2035, 2040, etc.
What kind of fees do Target Date Funds have?
The industry average total expense ratio for Target Date Funds is 0.55%. In other words, the fund will charge you $55 per year for every $10,000 held in the fund.
This fee—0.55%--is higher than many simple index funds, which typically have fees lower than 0.10%. However, some brokerages offer lower fees on Target Date Funds. For example, Vanguard charges 0.12% on its Target Date Funds.
For many Target Date Fund investors, the 0.55% fee may be expense worth paying.
Who is a Target Date Fund good for?
Target Date Funds can be most useful for two specific groups of people.
The first group is new investors. New investors are still “learning the ropes” of investing. It can feel risky to invest thousands of dollars into the stock market if you are still learning. A Target Date Fund will take on the role of being the “expert,” making investment choices on behalf of the new investor. If the new investor wants to learn more and change their investment, they certainly can! And let’s face it--they probably should! But in the meantime, they can be capturing the benefits provided by the Target Date Fund.
Target Date Funds are also a choice for investors who just want to keep things simple! They do not want to rebalance their investments every 6 months. They do not want to consider their “glide path”—or how they should adjust their asset allocations as they approach their goal. They do not want to be concerned with stock funds and bond funds and gold funds and…. whatever other funds they think they might need. Instead, these investors want a straightforward, set-it-and-forget-it strategy.
Target Date Funds can be a worthwhile investment for many long-term investors and have provided an onramp for people looking to save for retirement.