Photo by Mike Licht
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.
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…
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.