What Are Target Date Funds?

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Target date funds have become very popular with retirement savers. Today, they are a common and widely-used fund for many 401(k) and 403(b) plans. But what is a target date fund? Quite simply, it’s a fund that is targeted to your retirement year. For example, if you are currently age 40 and plan to retire at age 67, you may be invested in a Target Date Fund 2045.  The year closest to your retirement year is usually part of the name of the fund. The idea of target date funds is that they become less exposed to stocks as you age, and increase exposure to bonds as you approach retirement. There are a couple of points to keep in mind if you are using one of these funds.

Is it a “to” or “through” fund?

It may take a call to your broker or financial planner to find out which type of target date fund you have. You can also dig into the fund prospectus and check what’s known as the glide path to figure it out. Basically, a “to” fund rebalances each year until your target year (2045 in our above example). This means the fund is designed to gradually become less exposed to stocks each year until it reaches your retirement date in 2045. At this point, the fund manager stops rebalancing the fund and it stays “as is”.

A “through” fund keeps going. The fund manager will keep rebalancing your fund beyond your retirement date. This means that once you retire your target date fund continues increasing exposure to bonds and decreasing exposure to stock. If you need to generate more income, this may not be a positive feature of the fund.

Should you sell?

Once you retire, you need to work with your financial planner to determine if you need to sell your target date fund. For some investors, selling opens up additional investment options to help generate income and offset inflation and spending. For others, the target date fund may be just the conservative approach that fits their need. To decide, you have to consider your age, risk profile, number of anticipated years in retirement, how much you plan to spend, and how much your fund has grown (i.e., how much do you have to work with).

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If your target date fund is in your tax-advantaged 401(k) or IRA for example, you can make trades to rebalance and not be concerned about paying tax until you ultimately sell to take a distribution. This can be helpful if you want to rebalance your account for retirement. Please keep in mind that if you hold a target date fund in a taxable brokerage account, selling will incur tax! Talk with your financial planner before you pull the trigger on that decision.

As an independent Certified Financial Planner™, I can help you decide your retirement investments.  In addition, I can help you make decisions and layout a plan for spending in retirement. No matter where you are in life, a CFP® professional can help you create a financial plan for today and tomorrow. Contact me and let’s get started! #talktometuesday #education #Hireaplanner #retirement #income #targetdatefund #IRA #401k #CFPPro #LetsMakeAPlan