Choose a Fund With a Target Date That Suits Your Goals, Not Just Your Retirement Year
It may be time to rethink which date fund you are investing in, with a different calculation in mind.
To summarize, set date funds are mutual funds set up by brokers based on your retirement year. They periodically rebalance, becoming more conservative as they approach the target year. These are simple, convenient products for retirement investors.
This makes them good for newbies, as I wrote here , but not necessarily for more experienced investors. However, they are “offered by nearly 90% of employer-sponsored defined contribution plans,” according to Finra.org .
So, if you are stuck with deadlines, you must watch out for pitfalls. One is that you may find that the asset allocation of the fund in question does not match your actual risk tolerance (in my experience, it was too conservative) if you select the actual year in which you think you can to retire, and here’s how people are usually advised to choose one. (For example, if you are in your 20s this year and plan to retire at 65, you could opt for the 2055 fund.)
Instead of focusing on the year, choose a target date fund that matches your risk tolerance and investment strategy. For example, you may be offered several funds with the same expiration dates, but the methods to achieve them differ. The target year in the name of the foundation may give you a sense of security that this is the right year, but that doesn’t mean it is right for you.
“Fixed date funds tend to become more conservative over time, but the initial and final allocation of a fund’s assets and the speed at which funds become more conservative – the ‘rolling trajectory’ – can vary greatly from fund to fund,” Finra notes. …
It is important to pay attention to this so-called “sliding path” (you should find it in the fund’s prospectus). “Remember that there is no single correct or ideal sliding trajectory, and that both the risk and performance of your trust fund are likely to depend on the sliding trajectory planned for the fund,” Finra writes.
If you have two or three different fund offerings with the same maturity, compare their strategies with your risk tolerance and choose the one that suits you best. Also, remember to check periodically to ensure that this path is rejected and that you are still comfortable with the asset allocation.
And, of course, check the fees for each fund . The fact that two or more funds may have the same end date does not mean that they are created in the same way.