How Good Are Targeted Retirement Funds?
Targeted retirement funds are mutual funds that often set an explicit retirement year to attract investors planning for retirement within different time frames. Targeted retirement funds can adjust risk exposures of their portfolio holdings over time as the specified retirement year approaches. Investors may choose among targeted retirement funds to fit their expected retirement age with the preset retirement year by a fund. Targeted retirement funds are often funds of funds, investing money in other mutual funds inside the fund family to meet the retirement age based fund objectives.
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Simplicity
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Targeted retirement funds are often touted as investments of "set it and forget it," mainly because the funds will automatically adjust investment holdings based on the number of years remaining until the fund-set retirement year. Since targeted retirement funds are a "one size fits all'' investment approach taking into account only the age of retirement, investors often are required to conduct much less fund research to compare own investment goals with a fund's investment strategies. Instead, investors simply match their expected retirement age with the retirement year specified by a fund.
Variability
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Targeted retirement funds offered by different fund companies can be different in terms of their willingness toward risk taking. While some funds are more conservative increasing weight on bonds, others are more aggressive, raising bets on stocks. However, during most of the investment years, all targeted retirement funds likely invest more in stocks than in bonds. Investing at different risk levels, funds are expected to achieve different returns. Although targeted retirement funds tend to employ simple investment approaches by using existing funds in the family with a sole consideration for retirement, investors can still have certain flexibility in choosing a fund that fits with their basic risk profiles.
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Affordability
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Investing in targeted retirement funds can be an inexpensive way of saving for retirement. Affordability can be reflected in both fund charges and advisory fees. Targeted retirement funds are likely lost-cost mutual funds, as fund management is not required to have intensive and active portfolio constructions. Managers simply choose funds from their mutual fund family to allocate fund money and make changes over time by shifting from more aggressive funds to more conservative ones. On the investor side, investment advisory fees may also be saved, as investing in a targeted retirement fund doesn't require having investment advisers to perform detailed analysis of individual investors' unique retirement needs. Investors can simply pick an age-matching fund themselves.
Dependability
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Investing in targeted retirement funds may not achieve the best performance, but the results generally are dependable. As the fund-set retirement year draws close, the fund will have become primarily an income-focused bond-like fund that can provide ongoing income to investors who have since entered retirement. The fund will still hold a small percentage of riskier assets such as stocks. A blend of investment assets of different risk levels often produce more reliable expected returns than filtering through individual securities to create fund holdings.
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