A Hands Off Approach to Investing: Target Date Funds

What are Target Date Funds?

Target date funds are an investment vehicle that provide broad diversification while incrementally decreasing exposure to riskier assets (e.g. stocks) and increasing exposure to safer assets (e.g. bonds) as each fund’s target retirement date approaches. For example, if you invest in a 2060 Target Date Fund, then the fund will shift more and more into safer assets as time gets closer to the year, 2060. Target date funds often go by other names such as “Lifecycle funds”, “Target Retirement funds”, or “Lifepath funds”.

Why Use Target Date Funds?

Target date funds are useful for folks who want a hands-off approach to investing. These vehicles adjust risk as you get closer to retirement without the need of the investor manually adjusting their portfolio allocation each year. These funds typically provide asset diversification based on geography, cap size, and risk. This means that the funds hold large company stocks, small company stocks, U.S. stocks, international stocks, and bonds. Because of their simplicity, they have been increasing in popularity (Source). Back in 2016, Ben Carlson, Director of Institutional Asset Management at Ritholtz Wealth Management, went so far as to call them, “The Most Important Retirement Fund Right Now” (Source).

How Do I invest in Target Date Funds?

The most common method of investing in these funds is contributing through your employer’s 401K or 403B.

Which Target Date Fund Should I Choose?

Most target date funds assume retirement at the age of 65. If you think you will retire earlier or later than this age, then you might want to adjust accordingly. Personally, I see the odds of retiring at a certain age as a probability. I might retire at age 65, but I also might retire a little earlier or a little later. Because of this, I spread out some of my investments across different target date fund time periods, assuming I retire at age 55, 60, 65, or 70.

Target Date Fund Tool

Published on Tableau Public

Target Date Fund Tool Assumptions

  • Most of these funds assume retirement at age 65
  • The asset type allocation percentages are based on target date fund information provided by each broker’s website. Even if your company uses funds from one of the above brokers, your choice of funds might be different. Check the ticker symbols for each fund to verify they are equivalent.
  • The allocation percentages are approximate as of May, 2020. Funds often hold some cash and exact allocations change on a daily basis. Cash is assumed to be in the bonds category for this exercise.

~ The Data Generalist

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