A target-date fund operates under an asset allocation formula that assumes you will retire in a certain year and adjusts its asset allocation model as it gets closer to that year. The target year is identified in the name of the fund. So, for instance, if you plan to retire in or near 2045, you would pick a fund with 2045 in its name.
The structuring of these funds addresses an investor’s capital needs at some future date—hence, the name “target date.”.
This is in contrast to other target-date funds, known as “to funds,” which will cease any modifications to asset allocation once the target date is reached. Target-date funds are popular with 401 (k) plan investors.
This of course begs the query “What are target-date funds?”
Target-date funds offer asset allocation within the fund to investors based on their anticipated retirement (or other) date. Funds with a long target date such as 2060 have a more aggressive mix of securities in the fund than funds with a near-term target date like 2025.
What is a’target-date fund’?
What is a ‘Target-Date Fund’. The asset allocation of a target-date fund is therefore a function of the specified timeframe available to meet the targeted investment objective. A target-date fund’s risk tolerance become more conservative as it approaches its objective target date.
What are Vanguard’s target-date funds allocated to?
In the years beyond the target date, both Vanguard target-date funds report an asset allocation mix of approximately 20% in U. Equities, 10% in international equities, 40% in U. Bonds, 10% in international bonds, and about 20% in short-term TIPS.
When does a target-date fund reach its most conservative allocation?
Generally, a “to retirement” target-date fund will reach its most conservative asset allocation on the date of the fund’s name. After that date, the allocation of the fund typically does not change throughout retirement.
Can a target date fund be the only fund in 401 (k)?
The diversification and automatic rebalancing mean that a target-date fund can be the only fund in your 401 (k) account. As you near the target date, the fund will progressively become more conservative, and you will be exposed to less stock and more bonds.
One article argued that what to do: Be sure that your target fund’s glide path suits your retirement goals-you can find this information on your 401 (k) plan website or by downloading the fund’s prospectus. As noted above, you can opt for a target-date fund designed for a different year if you aren’t happy with the current mix.
Target-date funds have diversified portfolios and are designed to be the single holding for retirement savings, so investors generally do not need to invest in multiple target-date funds. Investors should note that the investment approach varies by target-date provider.
Should you invest in target-date funds for retirement?
1 Target-date funds provide a simple way to save for retirement. 2 They offer exposure to a variety of markets, active and passive management, and a selection of asset allocation. 3 Despite their simplicity, investors who use target-date funds need to stay on top of asset allocation, fees, and investment risk .
What target date should you set your 401k?
When steering you toward a target-date fund, most 401 (k) plans recommend using age 65 as a benchmark. But the funds are offered in five-year increments, and investors are often imprecise when choosing their target retirement year, research shows.
Should you change your 401 (k) plan target year?
After all, your goals may have changed or you may be better off with a customized fund portfolio. When steering you toward a target-date fund, most 401 (k) plans recommend using age 65 as a benchmark . But the funds are offered in five-year increments, and investors are often imprecise when choosing their target retirement year, research shows.