January 26, 2022

Target Date Investment Funds for your 401 (k)

Target date funds are risk-based retirement investment funds that are generally designed to be used as a single investment option

Most 401(k) plans provide participants with multiple investment options. That’s not news to anyone. If you do not select how you want your 401(k) contributions invested, your company may use a target date mutual fund as your default investment option.

(If you’ve ever heard the term lifecycle fund, we’re talking about the same investment option here — target date mutual funds and lifecycle mutual funds are one and the same.)

What are target date funds, and how do they work?

Target date funds are risk-based retirement investment funds that are generally designed to be used as a single investment option. Over time, the mix of stocks and bonds included in a target date mutual funds automatically becomes more conservative as you near retirement.

These professionally managed funds provide participants with well-diversified exposure across asset classes. All target date funds decrease exposure to equities and increase exposure to bonds and fixed income as they near the fund’s target retirement date.

Although some investors select a target date fund to simplify their asset allocation decisions, most target date funds are selected based on an investor’s current age and the year in which they may retire (typically at age 65).

For example, a 50-year-old investor could consider a 2035 fund option, since they would turn 65 that year.

  • Depending on your risk tolerance, you can use a target retirement year beyond the year you’ll reach age 65. Doing so will increase your equity exposure for a longer period, increasing your risk and potential return.
  • If your investment approach is more conservative, you may want to select a target retirement date lower than the year you’ll reach age 65. This will provide you with greater bond and fixed income exposure for a more extended period.

It is also essential to consider when a target date fund reaches its most conservative investment position — the point in time when equity/stock exposure in the fund is at its lowest point. Some risk-adjusted retirement growth funds do not reach their most conservative investment positions until 10 to sometimes 25 years beyond the fund’s target retirement date.

Why is this important?

Simply put, you want to make sure you don’t outlive the money you’ve set aside for retirement! Target date funds that continue to have more considerable equity exposure past age 65 may help participants to achieve continued asset growth throughout their retirement years.

Target date funds are professionally managed investments that can be an excellent option for retirement plan participants. But before jumping on board, review the specific target date funds offered in your retirement plan to understand how they work.

Best of all, you don’t have to go it alone. At Plimoth Investment Advisors, we focus on providing clients with high-quality investment options designed to reduce risk while providing superior long-term performance. We’re proud to offer superior investment management services delivered in personalized ways that larger firms simply can’t offer.

Contact us to learn more about target date funds and how they might be a worthwhile component of your retirement portfolio.

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