Target retirement funds are mutual funds that are geared toward investors that have a specific target retirement date. The idea behind these funds is they change their asset allocation over time to meet the needs of the investor.
If your planned retirement date is far away (say 25 years) then the fund will have a more aggressive asset allocation with a higher proportion of stocks compared to bonds. If there is less time to retirement – then the fund will probably have more bonds than stocks.
The key difference between these funds and other mutual funds is that they will change their asset allocation over time to reflect the shortening of time to retirement. Other types of mutual funds either never change their stock/bond ratio or only do so according to market conditions.
Target retirement fund example
If you are planning to retire in the year 2035 then you might buy an ABC Target Retirement 2035 fund. Since that year is pretty far away, this fund will have significantly more stocks than bonds. Most funds of this type would probably have around 80% stocks and 20% bonds.
If your retirement is only a few years away – let’s say in the year 2015 then you might own an ABC Target Retirement 2015 fund. A rough estimate of the asset allocation might be 80% bonds and 20% stocks.
Pros of target retirement funds
- These funds are easy – they save you the work of continually monitoring and changing your asset allocation.
Cons of target retirement funds
- Potentially higher costs for the same reason as balanced funds.
- One size fits all doesn’t necessarily fit you.
- Effectiveness is reduced if you own other investments. If half your investment is a target retirement fund and the other half is in stocks – then you are defeating the whole point of owning one of these funds.
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