One of the biggest hurdles for people looking to invest in their retirement is time. They worry that they have to pore over every detail and have to constantly track every rise and fall of the stock market. That can be discouraging, but if you had n option that allowed you to have a diversified portfolio with minimal effort? What if you want an investment that will take care of asset allocation automatically? Target date funds can give you all of that.
What is A Target Date Fund?
A target date mutual fund is a mutual fund consisting of a mix of assets, such as stocks and bond, that shifts and becomes more conservative as the retirement date draws closer. Most target date funds you see on sites like Vanguard are listed by estimated date of retirement in 5 year increments. So you’ll see Vanguard have a Target Retirement 2055 fun available for those around the age of 21 to 25. Re-balancing is automatic with these target fund and they are handled by the fund’s manager.
One concern is the one size fits all approach. Everyone in the fund has the same stocks, bonds, etc. The assumption is that all people planning to retire in 2030 (or whatever date) want the same allocations. The way around this problem is to select the fund with the desired balance instead of by date.
Based on Vanguard’s guide, here are some target funds dates to examine based on age:
- Age 18-20 : 2060
- Age 21-25: 2055
- Age 28-32: 2050
- Age 33-37: 2045
- Age 38-42: 2040
- Age 43-47: 2035
- Age 48-52: 2030
- Age 53-57: 2025
- Age 58-62: 2020
As you get closer to retirement, the fund should adjust and become more conservative. Even though investing your money into a target date fund can make things easier, that doesn’t mean you just forget about it. Setting up semi-annual check ups on your calendar can help you make sure the fund is meeting expectations. If not, you just have to tweak and adjust your portfolio accordingly.
Automating Retirement Contributions
The easiest way to stay on target for your investment goals is to go ahead and automate your IRA contributions. It has certainly helped me avoid skipping deposits. Even if you are limited on what you can contribute now, you should plan ahead for when you can increase your deposits.
In time, you’ll be able to start maxing out your IRA each year. Currently annual contribution limits to IRAs are $5,500. The advantage of starting early is the benefit of compound interest. The two most important factors for obtaining the benefit of compound interest are the interest rate and the length of time your money earns interest. The latter is the most important; your investment will grow slowly at first, but over the long term you will see dramatic improvements.
Thoughts on Investing
How about you? How are your investments doing?