Retirement is one of those topics that we probably don’t think enough about. But some day, you will stop working. It will either happen because you want to stop working or because you are forced to stop working. If you are confused about where to invest your retirement dollars let me help get you started. A great place to start is by using a target date fund. Let me show you what they are and how they work.
What is a Target Date Fund
A target date fund is sometimes also called a lifecycle fund. It is simply a fund that automatically invests your money for retirement based on how long you have until you retire. (Also known as your target date.)
A target date fund automatically invests your money with a given amount of risk based on your age and how close you are to retirement.
*Remember, there is a balance between risk and reward. The more risk you take you then have a chance at a really high reward. But the less risk that you take then the less your reward. Here is an article that goes into more detail about this.
As you get closer to retirement age, naturally you will want to take on less risk in your investments. This is because if the market goes down right before you need the money, then you don’t have enough time to recover before you need the money. But if you are young and don’t need the money for several decades, you can afford to take on more risk. Because if the market goes down, you have plenty of time to recover.
A 25 year-old has a lot more time to recover from a market downturn than a 55 year-old does.
Let’s use an arbitrary number to help paint this picture.
On a scale of 1-10 (from not risky at all to really risky investments), the older you get then the lower you want that number to be.
It might look something like this:
| Age | Risk-O-Meter |
| 25 | 9 |
| 35 | 7 |
| 45 | 5 |
| 55 | 3 |
| 65 | 1 |
This is what a target date fund will do for you. It will automatically ratchet down the risk in your portfolio based on the number of years until your retirement.
That way you don’t have to go into your investments, hire an investment advisor, or look to a robo advisor to do that.
Target date funds usually have a name that has a year attached to it. The year is the anticipated year that you would retire.
So for example if you are 35 right now (and the year is 2025) and want to retire at 65 you would want to choose a target date 2055 fund.
Who Can Benefit from a Target Date Fund
Target date funds are a great tool for most people saving for retirement. You probably want to have a more diversified portfolio than simply investing into the same target date retirement fund throughout your career.
But certainly, if you are just starting saving for retirement or you just don’t know where to begin, begin here.
Target date funds will become more conservative throughout the years, which is what you will want as you get closer to retirement.
I have a target date fund, myself. It isn’t the only fund that I have within my retirement portfolio, but I do have one.
And I do not recommend or suggest that you do something that I wouldn’t do myself. 🙂
Final Thoughts
Target date funds are a great place to start when you are investing. But as always, make sure that the expenses and fees aren’t too high and that the returns have been decent for the past several years of the fund.
You can do this!
I am here for you!
Until next time!
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