Target Date Funds are sometimes referred to as Life Cycle Funds. 
Let’s take a look at them and then you can decide if this is your best course of action.
What are Target Date Funds?
Target Date Funds are sometimes referred to as Life Cycle Funds. These funds take an approach based on one’s potential life cycle. For example, if you plan on living to 95 and you are currently 20 years old, the life cycle is 75 years. This is 45 years until theoretical retirement age of 65 and then living another 30 years in retirement. So, if you began your retirement investing at age 20 in 2020, you would pick a target fund of 2095.
Depending on your current age, subtract it from 65 and add 30 years to pick the Target Date Fund. If you are 50 today, that would be 15 years until retirement, plus another 30 years in retirement. You would pick a target date of 2066.
Once you have decided on the target date, you can set it and forget it. This is the concept behind these funds.
Why 85% of Retirement Funds are Using THEM
Target Date Funds are popular primarily because they are the default in many, if not all, retirement plans. What usually happens is employees are signed up for the 401k (or some similar employer sponsored plan) and contributions are made for the employees. If the employee does not select an investment for these funds, they are defaulted to a Target Date Fund based upon their date of birth.
Many folks do not know what to invest in and they just follow the herd and allow their retirement funds to be invested in this manner. Most do not know about investing and many have not spent any time learning about investing. So, they end up in Target Date Funds.
We could actually build a case that these funds were invented for these unsophisticated investors. Are they the right choice? The answer actually depends on what you may be comfortable with doing with your retirement funds.
There are pros and cons. We will discuss those later.
How do Target Date Funds Work?
These funds are managed based on the retirement date picked. Most are defaulted to a particular date based on your date of birth. The overall concept is that the further away from retirement, the more risk one can take on.
In other words, equities (stocks) are perceived to be a higher risk. The portfolio mix will be weighted more to stocks the further away you are from retirement. As you get closer to retirement, the portfolio begins to take on more fixed income.
As you begin your journey saving for retirement, your investments will be a much higher percent in stocks. The thinking is that you have more time to recover from an adverse market correction or crash.
When you begin to approach retirement, you should move to a more defensive portfolio, preserving capital moving to more fixed income such as corporate bonds or U.S. government bonds.
Should You Use Them?
The short answer is: it is up to you. There are definite pros and cons. The best defense is to educate yourself on investing. You do not need to become a trader or an expert, but you need to understand the various markets. The use of an investment advisor may also be an alternative.
Target Date Funds Pros
Create a passively managed portfolio that automatically rebalances based upon your retirement date.
Create a set-it-and-forget-it situation. Once you pick the fund, all contributions will go into that fund and you will not need to do anything else.
Don’t require a lot of knowledge about investing.
Target Date Funds Cons
Can have costly fees, which reduce your overall return.
Can be too conservative, reducing your returns and not keeping pace with inflation.
Are based on a one-size-fits-all methodology.
In conclusion, it is your money and your retirement. The choice is yours. My recommendation is: Do your homework and pick wisely. Target Date Funds are not the only choice, but they seem to be the most popular. Are they the best choice for you? QCBN
By Steven Calabrese, CPA
Other articles on home buying can be found here: bit.ly/3cNSC7G. Steven Calabrese, CPA, is the CFO of West Yavapai Guidance Clinic. He also is the owner/operator of a website known as thebiweeklyadvisor.com, where such topics as budgeting, investing, paying off debt and goal setting are discussed.
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