Target Date Retirement funds are a professionally managed collection of mutual funds designed to help you invest for retirement and meet your changing financial needs over time.
Each fund is made up of a broad range of investments. This is important when saving for retirement because spreading your investment dollars among different types of investments can help reduce volatility.
Investments in target date funds are allocated among a diversified portfolio of stocks and bonds. Investors select a target date fund, usually the one nearest their target retirement date. Over time, that fund's mix of stocks and bonds will shift toward more conservative investments. This gradual shift over time is called a "glide path."
Significant stock investments throughout the lifetime of your fund can help manage the risk of outliving your savings in retirement. An increased emphasis on bonds as you near your retirement date can help manage the risk of market declines. The fund is managed past retirement, so you could feasibly use a single fund for decades.
Low fees are essential to positive investor outcomes. There are fees and expenses associated with investing through an employer’s retirement plan. High investment fees and costs can reduce your long-term retirement savings. The lower the costs, the better it is for your retirement.
A typical target date fund’s approach to allocating between stocks and bonds puts more emphasis on stocks than some other target date funds. This helps manage the risk of investors outliving their savings. They also place a greater emphasis on dividend-paying stocks to provide more equity exposure while managing volatility.
The "target date" is the year closest to the year you plan to retire. For example, for somebody who is 25 and plans to retire at 65 in 2020, their target retirement date fund would be a 2060 fund. The retirement age is 65 for many investors but may be different for you.