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The Pros and Cons of Target Date Mutual Funds

Would it surprise you to learn that 50.3% of U.S. adults 55 and older have left the labor force because of retirement? It might not surprise you to learn that 66.9% of 65- to 74-year-olds were retired.

As a working adult, you spend years planning for the time when you’ll hit the eject button on your career and join the wonderful world of retirement. 

Do you have an age in mind when you hope to retire? As you work to manage wealth and prepare for the retirement years, it’s an important question to consider. 

Target-date mutual funds are a retirement investment option that asks you to earmark your retirement year. It’s an interesting idea for retirement investing. 

Wondering how target-date mutual funds work and whether they’re a smart option for you? Read on to learn more. 

What Are Target-Date Mutual Funds?

A target-date mutual fund is a type of mutual fund that is specifically designed for retirement planning.

Often those planning for retirement hear the wealth management strategy to lower their investment risk as they near the retirement age. Often what’s recommended is to move away from stocks towards bonds as that age nears. 

In a regular mutual fund, that would mean you would need to monitor your investment portfolio and make those adjustments manually. 

A target-date mutual fund is actually set up to make the necessary adjustments for you. It’s set up to invest over time and plan for the prenamed retirement date.

How Does a Target-Date Mutual Fund Work?

Target-date mutual funds are set up to invest in a combination of stocks, bonds, and sometimes even cash. 

Early in the life of the mutual fund, the managers will invest more of your money into the stocks, which tend to be riskier.

As you get closer to your retirement age, the fund manager will automatically adjust to less risky and volatile investments on your behalf. 

As an investor planning for retirement, this makes it easy for you. You simply put the money in and give an expected retirement date. The target-date mutual fund manager adjusts the investment over time for you.

Role of Asset Allocation

Wealth managers will often talk to their clients planning for retirement about diversifying their assets to avoid too much risk from any one investment. 

Asset allocation is how an investor diversifies their investments

So, how does asset allocation matter for target-date mutual funds? Asset allocation is the choice of where you’re investing your money at any given time. 

With a target-date mutual fund, the asset allocation changes over time as the investor gets closer to the target date for retirement to reduce their risk in the investment. 

Advantages of Target-Date Mutual Funds

With any type of investment, there are pros and cons. Target-date mutual funds are no exception. Let’s take a closer look at some of the advantages of this type of retirement investment option.

Simplicity

Many people get intimidated and even reluctant when it comes to investing because it can feel overwhelming and complicated. 

A target-date mutual fund is a very simple retirement investment option. You choose the actual target-date mutual fund, start investing, name an expected retirement date, and you’re done. 

You can keep investing in the fund over time. The mutual fund manager handles the rest for you.

Diversification

Basic investor knowledge tells you to make sure you reduce your risk by diversifying. The asset allocation that automatically happens for you in a target-date mutual fund can save you the hassles and you know you’re safely diversified. 

A target-date mutual fund actually invests in shares in index funds that hold shares in hundreds or thousands of businesses. This allows the fund manager to keep money diversified and have access to move the funds as needed over time. 

Availability

Target-date mutual funds have caught on in popularity in recent years. Some companies even have them as an option with their 401ks. 

Other major investment houses have their own line of target-date funds. 

The options for investors interested in this type of retirement investing have greatly increased in recent years.

Adaptability

The importance of risk should always be a consideration when investing. As a younger investor, you can take the chance with more risky investments. You have time on your side. 

As you get older though, you want to decrease that risk. 

The beauty of the target-date mutual fund is that it adapts for you automatically. 

Target-Date Mutual Fund Drawbacks

With any investment option, there are many things to consider. You should be aware of a few potential pitfalls related to target-date funds too. 

Control 

The advantage to a target-date mutual fund is that there’s a manager handling the asset allocation. It’s their role to manage the fund for you. 

When you have them take over that management though you do lose some control over the investment. Some people appreciate the idea of putting the money in and having someone else handle things. 

But if you’re a control freak, it’s something to consider.

The target-date mutual funds take some of your flexibility and control over the investment once you put your money into it. If you wanted to change your investment strategy, you’d have to sell from the target-date fund and buy into another option.

Fees

All mutual funds charge a management fee. Typically, you’ll pay a percentage based on your investment value. This is commonly referred to as the expense ratio. 

With any investment and fees, you want to consider if the fees will end up outweighing the potential growth from the investment. 

Finding the Best Investments for Your Retirement Plan

Target-date mutual funds are an interesting option for less risky retirement planning. They don’t require your hands-on management and you get the knowledge of a fund manager handling your asset allocation over time. 

Do you need help with customized financial planning for your retirement investing? It’s our pleasure at Bogart Wealth to help people plan their financial future. Contact us today to get started. 

IMPORTANT DISCLOSURE INFORMATION:
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level (s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at bogartwealth.com


Please Note: Bogart Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bogart Wealth’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
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