Using Target Date Funds to Simplify Retirement Planning


retirementYou’re probably pretty good at what it is you do on your job or in your business. But that doesn’t mean that you are an expert when it comes to retirement planning. The reality is that most people are not–after all, retirement planning isnâ˜t what you do for a living. Retirement planning really is a financial specialty, and sometimes that’s just best turned over to the professionals who know it best.

But if you decide you want to turn it over to others to manage, how can you do that without spending a fortune on investment management fees?

One way to do that is with target date funds. Target date funds are based on your year of retirement, and customize the asset mix to match that date.

Target date funds build a portfolio based on your age

Let’s say that you are 30 years old, and you want to retire at 65. It’s 2013, so your retirement date will occur sometime during 2048. All you need to do is select a target date fund based on retirement in the year 2048. You can invest in the funds now, and the allocation within the fund will automatically adjust as you get closer to retirement.

You can be certain that the allocation between stocks and bonds fits your current age, at any age going forward. The portfolio will become progressively more conservative as you approach retirement age.

Diversification is done for you

One of the best advantages of target date funds that there is no need to buy stocks and bonds, and you never have to worry about diversifying between holdings. The job of diversification is done automatically as part of the fund. It’s almost as if you had a fund customized to your own needs, except that there may be thousands of other people invested in the same fund.

It’s sometimes said that target date funds are a mutual fund of mutual funds❠because each fund holds several other funds, based on growth and safety. But that arrangement removes the jobs of security selection and asset allocation from you, then properly divides them among the funds in the overall target date fund. All you need to do is put your retirement money into the fund, and the fund managers take it from there.

No need to change allocations as you get older

One of the biggest challenges for most amateur investors is changing allocations as they get older and circumstances change. You may never be entirely certain when the right time is or even to what degree it needs to be done. A target date fund will do that for you as time passes.

And no need to rebalance, it’s done automatically

Rebalancing is one of the most difficult tasks for an investor to handle. Rebalancing is the process of trying to maintain your allocation in the face of changing valuations. For example, you may decide you want to hold 70% of your assets in stocks but as the value of the stocks rise in a given year, you find the stock allocation now exceeds 80%. At what point do you rebalance and move the excess stock holdings into your fixed income positions?

With a target date fund you’ll never have to concern yourself with that, it will be done automatically. Rebalancing is perhaps the most mechanical aspect of investing, and is more easily done by a professionally managed mutual fund than by an individual. The fund manager will handle this within the fund portfolio, freeing you of the responsibility to sell some securities and buy others in order to keep your position property balance

The fees charged by target date funds are generally higher than what they are for most mutual funds. But for a person who is entirely uncomfortable handling their own retirement investing, the fees may be worth paying. You can invest your money in a target date fund, then forget about it and get on with what it is you do best.

Do you have any of your retirement money invested in target funds?

photo by Tax Credits

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Written by Kevin

With backgrounds in both accounting and the mortgage industry, Kevin Mercadante is professional personal finance blogger, and the owner of OutOfYourRut.com, a website about careers, business ideas, money and more. A committed Christian, he lives in Atlanta with his wife and two teenage kids.

Kevin

With backgrounds in both accounting and the mortgage industry, Kevin Mercadante is professional personal finance blogger, and the owner of OutOfYourRut.com, a website about careers, business ideas, money and more. A committed Christian, he lives in Atlanta with his wife and two teenage kids.

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