May 13, 2013
What is a Target Date Fund and how does it work? What questions should you ask BEFORE buying one?
What is a Target Date Fund and how does it work? What questions should you ask BEFORE buying one?
A target date fund is a retirement plan where you pick the date at which you will retire and then you begin to invest in this account. At the date you set you will be able to withdraw your money. During the time that you invested the money is invested in stocks and bonds. It starts out with riskier investments and as time goes on the investments become less and less risky, meaning the growth slows towards the end. Before buying one you should ask how much the annual expenses are. If they are too high you will be negating the interest you make in fees.
Well said, Thomas. Let’s recap. A Target Date Fund is a fund designed to hold all of your assets (primarily stocks and bonds) in one fund and it will gradually rebalance over time (sell stocks and buy more bonds and cash) as you get closer to the date in which you will start taking money out of that fund. The longer the date, the more stocks you will have within the fund. The shorter the date, the more bonds and cash you will have in the fund. Now let’s take a closer look at how this fund could be used, which one to select, and where to go.
You can use this type of fund for retirement, college, buying a home, starting a business, and much much more. Basically, you identify your goals, select the target date fund that fits those goals, and then patiently keep feeding that fund to achieve your goals. Just as Thomas stated, focus on costs when selecting these types of funds. Vanguard provides the best Target Date Funds at the lowest costs as each of their funds are invested in other Vanguard index funds. The average yearly cost will run you around .17% per year on the money you have invested, and of course there is no commissions. Educated investors NEVER pay a commission to invest their money.
You may find a Target Date Fund in your retirement account at work. You can simply choose the year in which you will start accessing that money upon retirement and place ALL of your company retirement funds in that account (always identify the yearly costs with these funds, most are much higher than the Vanguard funds). There is no need to have other investments in your retirement account as you are already fully diversified within this one fund. Easy peasy!