Pros And Cons Of Investing In Target-Date Retirement Funds.
I’m sure that if you do any kind of investing at all you have heard about target-date retirement funds, where the stock and bond allocation inside the fund changes as you near your retirement date. All you have to do is pick a year (for me, it is supposedly 2040) and the fund managers do all the work. The basic idea behind them is that the closer you get to your retirement date, the more the allocation in the fund moves away from stocks and into cash holdings, to protect your investment. In other words, they become more conservative over time in an effort to prevent you from losing your retirement money. Sounds good, right? Well while they have gotten a lot of press lately, not all of it has been good. As for me, I believe in them and I have a Roth IRA invested in a TRowePrice target-date fund, but there are many people out there who think that they might not be a good idea. The fund I am invested in with Price is said to be one of the better ones, so I am happy about that, but let’s take a look at the pros and cons of these target-date retirement funds.
PROS
I am a set it and forget it guy. I know some people will have an issue with that in terms of my investing for retirement, but it is what works best for me. I do not know enough about investing in order to make all the right choices – that’s why I pay the guys in the suits to do it for me. Target-date funds are for people who like to leave the decisions to someone else who knows a lot more than they do. Also, the minimum dollar amount to start one of these funds is generally quite low, so they are good for beginning investors. TRowePrice offers a $50 minimum as long as you agree to automatically fund the account with $50 a month – they make it easy to get started. And while I have money invested in other mutual funds and individual stocks, I feel good knowing that some of my retirement money is being managed to work towards my retirement age. Of course, I would like to retire before then, but let’s be realistic…
CONS
If you like to have full control over your retirement investing, these funds are not for you. You cannot change the allocations to increase or decrease your risk, or if you like to control exactly what percentages you invest in certain markets, you would probably do better investing in something that you have more control over. Also, most companies offering these funds invest in only their own mutual funds, so if you are averse to that as well, you probably should not be using these type of retirement vehicles. One more thing to consider – if your retirement date changes, your fund doesn’t. Not everyone retires right on schedule, so keep that in mind when setting up one of these target-date funds.
If you do decide to look into investing in target-date retirement funds, be sure to do your research and look for no-load funds from companies like Fidelity and TRowePrice, which often garner praise for being better than a bunch of the other funds available.
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I’m curious. have you checked the health of those target retirement funds recently? How are they doing?
Actually, mine is OK. If you judge any fund because of the market we are in, most funds are down – that’s what long-term investing is all about.
I am a huge fan of the target date funds and have my roth ira at t. rowe price as well. I like because I can really let it be, it is after all, a long term investment.
With my husband’s 401K, we have to pick the investments, track them, allocate, re-allocate, etc. and having to that for one account is enough for me!
Great Article!
Take Care
LJ
I think the target date funds are great if you are a newbie and don’t have much of a financial background. Those with more knowledge are probably better off doing their own leg work.
I would definitely take one in my 401(k) if I didn’t have the option of picking Vanguard funds. Otherwise I like a certain latent amount of control.
Hey David,
I think target retirement funds make a lot of sense for the huge majority of people. The more passive you are, the more they make sense. I don’t really think there are any discernible drawbacks for the average retirement investor.
The only time people get into trouble with these is when they think it’s only a part of their retirement allocation, as opposed to all of it. Sometimes they throw them into their mix with all the non target date retirement assets creating some overlap. That would be the one piece of advice I’d offer investors thinking about them
Look forward to coming here more often, just got my feedreader updated and ready to go for the future..
Hey Ciaran, thanks for stopping by and hope you come by often!
Hi, i never thought seriously about the situation. really i was completely unaware about such things. Thanks for this information now i got to know why always i was seeking help in my hard time after retirement. Thanks for this useful information.
The target date-funds from T. Rowe Price, Vanguard and Fidelity are too new to consider their track records. Consumers should examine the asset allocation and be sure that it fits their tolerance for risk. If the fund is too aggressive pr conservative them, it may be best to consider other options. Indeed! Most fund companies will use a roster of their own funds in a target date portfolio.
-Joanne