Are Target Date Funds a Good Solution?
Take a look at your 401(k) investment options and you’ll likely find many target date funds. In fact, you may already be invested in it and not know it. These funds are designed to make investing for retirement easy. If you plan to retire around 2030, it is often suggested that you invest in the 2030 fund. However, are target date funds a good solution?
Pro’s
-It makes investing very simple. You allocate all of your retirement money into the fund and they make the investment decisions from there.
Con’s
-Your personal risk tolerance is not considered. For example, a 2040 fund might be invested in mostly stock, and even if that may be appropriate for you, you might not be comfortable with how that would perform in a down market.
-Your goals are not considered. If you plan to make a large purchase right at retirement like a beach house or a car, your goals could vary greatly from the average retiree. On the other hand, if you plan to live on a pension and Social Security and pass along these funds for future generations, you may be able to take more risk than others.
-The funds can vary greatly. In an article published in Barron’s earlier this year, they stated “…The $2.2 billion Fidelity Advisor Freedom 2040 fund (ticker: FAFFX) has 93% allocated to equities, while the $1.7 billion American Century One Choice 2040 (ARDVX) had 69% in equities.” Given the difference across the industry, you need to ask yourself if this is how you want to be invested.
Given the benefit of simplicity, I suggest considering the target date funds. However, you need to research the specific fund, your risk tolerance and your goals, and make a personal decision from there.
Disclaimer: We do not recommend any of the funds listed above. Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized investment, tax or legal advice. We suggest that you discuss your specific situation with a qualified investment, tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss. You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing.
Citations
Kapadia, Reshma. “One Target-Date Fund Is Enough. Except When It Isn't. (And That's OK.).” Barron's, Barrons, 14 Sept. 2019, www.barrons.com/articles/one-target-date-fund-is-enough-except-when-it-isnt-and-thats-ok-51568462401.