What Are Target Date Funds and Are They Right for You?

Target date funds may help meet your long-term financial goals. They can be a “set it and forget it option” that’s a good choice for savers who want simplicity. But they aren’t the right choice for everyone. Read on to see if they fit your plans.

To work with a financial advisor who can help you set — and meet — your financial goals, talk to Farm Bureau.

What Is a Target Date Retirement Fund?

A target date fund, also known as a TDF or TDF investment, is an investment portfolio designed around a goal with a specific time frame. The investments are automatically adjusted as you get closer to the target date. 

Retirement savings is a common use for a target date fund. You indicate the year that you plan to retire, and the investments adjust as you move toward that date. You’ll likely start with growth-oriented investments and shift to more conservative options that protect your investments as you approach the target date. This shift is called the glide path.

While retirement may be the most obvious use case, you can use target date funds for any type of long-term goal. For example, you may want to save for your child’s college education in a TDF tied to the year they will start their undergraduate education.

When Are Target Date Funds a Good Choice?

You might want a TDF if you like the idea of automatic rebalancing, along with a diversified investment portfolio that adjusts over time.  

Many employers offer target date funds as part of their 401(k) plan, which could be an easy way to invest for retirement. This may be especially useful for younger investors, as it is simple. As you get older and your portfolio grows, you can look into whether it makes sense to stick with the TDF or to switch up your portfolio.

What Are the Downsides of TDFs?

The automatic nature of target date funds might not meet your needs. These funds are designed to work for those who plan to retire at or near the target date, whether that’s a cohort of older workers investing in a 2030 TDF or young professionals just starting out who are contributing to a 2065 TDF. So while the investment risk will generally align with your timeline, it may not align with your personal risk preference.

TDFs may also have higher fees than other investment vehicles. Be sure to compare fees when you’re making your decision.  Fees that seem small can have a larger impact over the course of several years or decades.

Are TDFs That Have the Same Target Date All the Same?

No. Suppose you plan to retire in 2050. There are a range of year 2050 target date funds to choose from. They will likely all be growth-oriented because you still have a long runway to retirement, allowing you to ride out any market downturns. But they will all have their own distinct asset mix. For example, some will have more domestic stocks, and others will be weighted toward international stocks. 

Even though TDFs take a lot of the work out of investing, you’ll still have to make some decisions at the start. And while you don’t need to manage your TDF investments, it’s a good idea to check on how they’re performing once in a while to make sure they’re meeting your needs and expectations.

Could a TDF Help You Meet Your Goals?

A target date fund might be a good choice for you, but there still may be a lot to consider with the investing process. That’s why it can help to consult with Farm Bureau. Our financial advisors can talk to you about your personal situation and recommend investments designed to meet your needs.