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There is a belief in the broader personal finance community that investing for retirement is a complicated dance that only a few people are able to figure out. Accompanying this belief is the idea that it’s better to pay more attention on your investments than less, and you need to know the details of technical and fundamental analysis to be successful with investing over the long term.
Target-date funds encourage just the opposite. As the ultimate “set-it-and-forget-it” retirement option, the target-date fund is meant to be a simple and easy answer to the retirement planning question. You don’t need to spend even one hour on this, and perhaps more importantly, you don’t need any advanced knowledge of finance whatsoever.
A quick primer
Target-date funds are designed as passive investment vehicles that require no ongoing management. You simply need to choose one that has a target date closely resembling your retirement date (i.e., 2045 or 2050) and let compound interest do the rest.
The funds typically include broad market index funds that track global stock and bond markets. As time goes on, the fund’s underlying portfolio shifts to a more conservative allocation; in other words, the portfolio shifts away from stocks and more toward bonds as the retirement date approaches. This makes sense given that most people want to take less market risk as retirement approaches.
The central benefit of target-date funds is that they get more people investing for retirement. The reality is that many people don’t enjoy optimizing their investments or reading through pages of financial statements. They’re perfectly happy to continuously invest and let the target-date fund do all of the work.
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Solid returns without the hassle
Remember that a target-date fund is a “fund-of-funds,” meaning that it’s an investment that comprises other funds. So when you invest in a target-date fund, for say, three decades from now, you’re actually investing in three to five underlying funds that will change in weight over time.
You always have the option of buying those same funds directly and rebalancing your account on your own. Some people prefer that extra control. This would also save you the “wrap fee,” or the cost of bundling the funds together and presenting them to you as a single target-date fund that can be chosen from an investment menu.
Also recall that it’s best to view your 401(k) not as a single account but in the context of your entire financial picture. If you have substantial assets outside of your 401(k), the optimal investment for your retirement plan might be completely different than the one for someone just starting out in their career.
A good plan for many
Target-date funds present an easy opportunity for you to prudently invest for retirement. The only thing you’ll need to do is add money to your 401(k) and invest it in the fund that most closely matches your expected retirement date. The fact that it takes so little time and energy to do this is one of the great advances in money management. If you want to make investing more complicated, you certainly have the ability to do so, but target-date funds are out there should you choose to go the time-saving route.
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