Why Target-Date Funds are Best for Your Retirement Years?

By | January 16, 2014

“The trouble with retirement is that you never get a day off.”

Abe Lemons

Retirement is a stage of life where one requires financial support and proper care. The best thing you can do is to plan for your retirement. Target-date mutual fund is one of the best retirement options with low-maintenance requirements.

Why Target-Date Funds are Best for Your Retirement Years?

Why Target-Date Funds are Best for Your Retirement Years?

According to Investopedia.com:

“A mutual fund in the hybrid category that automatically resets the asset mix (stocks, bonds, cash equivalents) in its portfolio according to a selected time frame that is appropriate for a particular investor. A target-date fund is similar to a life-cycle fund except that a target-date fund is structured to address some date in the future, such as retirement.”

Target-date funds are the best investment options for investors with little or no time for planning their investments. These funds adjust according to the retirement age of the individual and turns to a conservative route before retirement years.

According to Morningstar, the investments in target date or age-based funds crossed the threshold of $500 billion in 2013. These funds are highly popular among 401(k) investors. Assets management companies are projecting these funds to constitute approximately half of the estimated $7.7 trillion in U.S. defined contribution assets by the year 2020.

What should you know about target-date funds before investing?

Target-date funds are one of the easiest investments to maintain and they are surprisingly one of the simplest ones too. These funds come with a fee structure, mixture of assets, and risk profile that makes it extremely difficult to measure the performance of the funds.

Some financial investors often argue about the generic nature of target-date funds and their inefficiency in meeting the requirements of every investor. However, the main goal of these funds is to ensure optimal returns and offer zero-maintenance to the investors. These funds are highly popular among investors investing through the 401(k) retirement plan offered by their employer. An investor can even opt for independent target-date fund according to the requirements.

If you are planning to invest in target-date funds, you should consider some important factors such as performance or fees involved in the process. Let us find out some important factors that you should consider in the process.

Top 4 factors to consider in target-date funds

  1. Choose low fees funds: One of the most important parts of the process is to look out for the expense ratios involved in your investment. Choose a fund with less than 0.50 percent fees because it will affect your overall returns. In 2012, the overall expenses in managing target-based funds were 0.91 percent, 0.99 and 1.04 percent in 2011 and 2010, respectively. Make sure to choose funds with lower expenses to gain considerable returns.
  2. Choose between “To” and “Through” funds:Target-date funds are prepared with separate asset-allocation formulas. In “To” target-date funds, your asset location will reach the most conservative composition towards your retirement. On the contrary, “Through” funds continue to grow even after your retirements.According to financial experts, investors with “To” approach choose low-risk investments, but along with lower risks comes another potential issue. These investors are at a higher risk to outlive their savings during their retirement. “Through” plans are aggressive in nature and offer better returns for the investors. According to the financial experts, investors who are partially withdrawing their retirement funds should choose “through” approach for better returns. This approach contains a higher risk, but ensures longevity of your savings.
  3. Performance of funds: Performance doesn’t make much sense in target-date funds because past performance does not guarantee future returns. Investors should consider asset allocation as the primary measure for choosing a target-date fund.
  4. DO it Yourself approach: DIY is the best approach in case of target-date funds. Most of the investors choose target-date funds offered in the 401(k) retirement plan offered by their employers. However, it is not your only option and you can choose different funds for investment.

There is no doubt about the low-maintenance required in target-date funds, but without proper monitoring and expense calculation, they might even erode your retirement savings. You can seek professional help in the matter and make the best choices for your retirement.

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