• Home
  • Start Here
  • Blog
  • Free Resources
  • Shop My Filofax Store
  • Shop TBM
  • Courses

The Budget Mom

Real Women. Real Life. Real Finance

  • Home
  • Products
    • Live Rich Planner
    • Budget By Paycheck
  • Blog
  • FREE RESOURCES
  • COURSES
  • Shop my Filofax store
  • Shop TBM
MENUMENU
  • BUDGETING
        • Categories

        • Budgeting Basics
        • Budget Guides
        • Budget Tips
        • Budget Recaps & Overviews
        • Living on a budget can be as challenging as sticking to a diet or committing to a workout routine. Here are tips to avoid burnout so you can achieve your goals!

          How to Avoid Budget Burnout: 5 Tips to Stay the Course

          When creating a budget, most of us focus on tracking our expenses, but tracking your income is just as important. This includes knowing your starting balance.

          What is Your Starting Balance & Why Does It Matter for Your Budget?

          Most of us have invisible money scripts that hold us back from reaching our financial goals. Learn what the three most common money beliefs are and how you can start taking steps to change them. 

          3 Money Beliefs That Might Be Holding You Back

  • SAVE MORE
        • Categories

        • Cut Expenses
        • Extra Income
        • Saving Tips
        • The true cost of a speeding ticket depends on your location, how fast you were driving, and any previous violations. Learn how much you can expect to pay after receiving a speeding ticket.

          Explained: The Surprising True Cost of a Speeding Ticket

          If you’re looking for ways to save, buying second-hand items might be a good idea. These 17 things are better to buy used instead of new.

          17 Things That Are Better to Buy Used Instead of New

          If you need to earn fast cash, selling household items online is the easiest way to do it. Here are 20 things in your home that you can sell right now.

          Need Cash Fast? 20 Things In Your Home You Can Sell Right Now

  • FRUGAL LIVING
        • Categories

        • Beauty & Health Tips
        • DIY
        • Family & Money
        • Food & Drink
        • Frugal Living 101
        • Household Tips
        • Holidays & Occasions
        • Kids & Money
        • Many people consider going to grad school but wonder if it’s worth the financial investment. Here are five questions you should ask yourself before committing to grad school.

          Should I Go to Grad School? 5 Things to Consider First

          Forget about a New Year’s Resolution! Try setting a New Year mindset instead. It might not seem like much, but your mindset can make or break your financial goals.

          How to Improve Your Financial Mindset to Achieve Your New Year’s Goals

          It’s not too early to start helping your child build their financial future. If you want to help your child start investing, here are the steps you’ll take to get started.

          How Can My Child Start Investing?

  • DEBT & CREDIT
        • Categories

        • Credit Cards
        • Credit Report & Score
        • Debt Basics
        • Get Out of Debt
        • Loans, Etc.
        • It’s easy to swipe a credit card, but paying it off is an entirely different story. Here’s what you need to know about the true cost of buying on credit.

          Revealed: The Ugly Cost of Buying on Credit

          Should You Buy Your Leased Car?

          Collection accounts can be stressful, but you can bounce back. Learn how to handle collection accounts and improve your financial picture.

          Has Your Debt Been Sent to Collections? Here Are Your Options.

  • FINANCE 101
        • Categories

        • Financial Planning
        • Investing
        • Retirement
        • Tax Tips
        • It might be tempting to withdraw investments, especially during times of economic uncertainty. However, most people should avoid touching their investments.

          The ONLY 3 Reasons to Touch Your Investments

          It’s that time of year again! Unfortunately, we’re not talking about the holidays. Now is the time for everyone to file their taxes. Here is what you need to know.

          2021 Tax Season: How to File for Taxes Online

          It’s not too early to start helping your child build their financial future. If you want to help your child start investing, here are the steps you’ll take to get started.

          How Can My Child Start Investing?

What Are Target Date Funds & Are They a Good Investment?

August 5, 2020
FINANCE 101

Share
Pin27
Share
Tweet
Email
27 Shares
  • Bio
  • Facebook
  • Pinterest
  • Latest Posts
Kumiko Ehrmantraut

Kumiko Ehrmantraut

Some links below are from our sponsors. Here's how we make money.
Kumiko Ehrmantraut
Kumiko Ehrmantraut

Kumiko Ehrmantraut

Kumiko Ehrmantraut

Latest posts by Kumiko Ehrmantraut (see all)

  • Should I Go to Grad School? 5 Things to Consider First - February 25, 2021

If you’re new to the world of investing, it’s easy to get overwhelmed with the options available. Fortunately, target-date funds are a good option for many first-time investors.

If you’re new to the world of investing, it can be easy to get overwhelmed with the options available. Investment vehicles like stocks, bonds, mutual funds, certificates of deposit, exchange-traded funds, and annuities are just some of the categories to consider.

With so many choices, where should a first-time investor begin?

Target-date funds (TDFs) were created to take as much guesswork out of investing as possible, making them a popular choice for new investors. Like any investment, however, target-date funds have pros and cons that must be considered.

  • Read: How to Start Investing with Little Money

So What Exactly is a Target Date Fund?

Target-date funds were structured to be a set-it-and-forget-it type of investment vehicle. The funds are structured with a future date of when you will need the money (say, retirement), hence the name “target-date” funds.

The funds themselves are designed to contain a mix of investment vehicles. They include equities (stocks) and fixed income (bonds) that rebalance the closer you get to the target date.

The further you are away from the target date, the more aggressive the funds will be to maximize potential growth in the market. This means that the funds will contain a higher mix of equities early on. As you approach the target date, the fund will automatically rebalance to include more fixed income to protect the earnings you’ve gained while still growing the account.

For example, if you’re 30 years old and are saving for retirement, a target-date fund might contain 85% stocks and 15% bonds. When you’re 55 years old, this same fund might have been rebalanced only to contain 30% stocks and 70% bonds. Different providers will offer a more sophisticated range of strategies and mixes.

In short, target-date funds:

  • Provide a simple way to prepare for retirement without having to be hands-on
  • Offer exposure to both equities and fixed income with different asset allocation options
  • Rebalance overtime to protect your earnings the closer you are to retirement

Of course, nothing is ever as simple as it seems. There are still pros and cons to consider when it comes to target-date funds. 

Benefits of Target Date Funds Explained

Simplicity

Traditionally, investors with a 401(K) had to choose several investments to create a retirement portfolio. In other words, investors traditionally had to decide what types of stocks and CDs to put into their own 401(K) account.

  • Read: Retirement for Beginners: The Roth IRA Explained

Target-date funds, on the other hand, mitigate the need for other assets. These funds include a mix of stocks and fixed income securities. Because the fund automatically rebalances over time, it can feel like a one-and-done approach. All you have to keep doing is investing in the account every month. After you’ve picked a fund, it rebalances as you approach the target date, so it requires little to no management from you.

Availability of Choice

Even though target-date funds were designed to be simple, there are still a variety of options to choose from. For example, you can select a fund based on your risk tolerance: conservative, moderate, or aggressive. In general, the higher the risk, the higher the reward. Like any other investment, however, the market’s past performance is no indication of future returns.

But even with the aggressive option, target-date funds always include fixed income securities, which provide an innate level of protection against losses.

Passive and Active Management Options

If a set-it-and-forget-it investment strategy sounds too hands-off, you can find target-date funds that feature either active or passive management. 

Active management features a human element, such as a single manager or a team of managers. These investors actively manage the portfolio on your behalf. It will still be relatively hands-off on your end. Still, you can rest with peace of mind knowing that financial experts handle analytical research, forecasts, and their own experience in making investment decisions for you.

Passive management, on the other hand, mirrors the market index. Instead of a team of investors attempting to beat the market, the passive target-date fund utilizes weighted average mathematics to reflect the market as closely as possible.

To recap, the key benefits of target-date funds include:

  • Simplicity for first-time investors
  • Ability to choose funds based on risk tolerance
  • Active and passive management options

What are the Downsides of Target Date Funds?

Fees Can Eat Away at Your Earnings

To make money investing, your earnings must outweigh the costs you spend on fees. Since a target date fund is inherently composed of multiple funds, it’s easy for these fees to add up. It’s not uncommon for these fees to add up to 1% or, in some cases, even up to 2%. This means that if the target date fund earns 8% every year, you will only see 6% or 7% of the actual earnings.

Lack of Flexibility

Target date funds are set for a specific date in the future, but what happens if you want to retire earlier than you planned? Or if you’re going to keep working a few years beyond that target date? Unlike other investments that can be quickly modified to address these needs, target-date funds are beholden to that future date. Also, because the funds are generally more conservative than equities, there is no guarantee that the fund will keep up with inflation.

  • Read: What You Need to Know Before You Invest in Mutual Funds

Some Companies Offer Little Diversification 

There are some companies where the funds within the target portfolio are all offered by the same company. These are known as “single fund families.” While there’s nothing inherently wrong with investing in the same company, it may not be the wisest choice to put all your eggs in one basket.

They Typically Underperform Other Investment Vehicles

A set-it-and-forget-it approach to retirement is undoubtedly nice, but that comes at the expense of risk and reward. Growth stock mutual funds, for example, focus on stocks of companies that are expected to grow at a faster rate than the rest of the market. These typically outperform target-date funds, but still offer protection by diversifying in multiple businesses. 

To recap, the downsides of target-date funds include:

  • High fees that can eat away at investment earnings
  • Lack of flexibility
  • Some TDFs only include underlying funds from 1 company
  • Underperform other investment vehicles

Are Target Date Funds Right for Me?

If you’re looking for an easy, hands-off approach to investing and preparing for retirement, a target-date fund may be right for you! Investing isn’t a one-size-fits-all journey, so determining whether this is your best option will require some introspection.

Target date funds aren’t the worst way to invest your money, but they aren’t going to provide high-risk, high-reward. Many consider it a safe bet for new investors, but you should still research and consider other options. 

Unless you’re willing to hire a financial advisor to help you allocate and actively manage your investments, a target-date fund may be right. Because the fund itself automatically rebalances the closer you get to retirement, you will enjoy the peace of mind knowing that your investments will be protected as much as possible while still providing a steady income stream to your account. However, this comes at the expense of higher fees and lower returns than a self-created portfolio or growth stock mutual fund.

Ask yourself the following questions:

What is my tolerance for risk?

If you have a low to mid-level risk tolerance, then target-date funds are likely a solid choice. However, if you want a higher risk with higher rewards, you may want to consider another option.

  • Read: Where to Invest Your Money for Short-Term Savings Goals

Do I want to modify the plan?

Again, as the name suggests, the target-date fund is designed with a specific future date in mind. If you can commit to that date, then a target-date fund is a great choice, assuming you accept that you cannot modify the plan moving forward.

Am I comfortable with the fees and expenses?

Every investment vehicle will have costs of some sort. Make sure that you understand the costs of anything that you invest in. This is true with whether or not you invest in a target-date fund or something else.

The Bottom Line

When it comes to investing, there are a vast amount of options. If you're wanting to invest, be sure to do your research and list out the pros and cons of each so you can find exactly what you're looking for.

I hope this guide has helped you understand the pros and cons of target-date funds! There is a no-size-fits-all solution, so continue to ask yourself what’s important to you.

Share
Pin27
Share
Tweet
Email
27 Shares

Filed Under: FINANCE 101, Investing Tagged With: INVESTING, RETIREMENT, STOCK MARKET, TARGET DATE FUNDS

Previous article:
« 4 Money Saving Challenges for Small Budgets
Next article:
Is Now a Good Time to Ask for a Raise? »

Comments

  1. Guerline Lareine Pierre says

    August 7, 2020 at 7:20 am

    What investment would you sugar and which company is reliable. I don’t want a high risk target fund. Iam more in medium risk I think. What’s the initial investment that you suggest

  2. Melly says

    August 10, 2020 at 1:47 pm

    Thank you for this explanation. Could you do some more simplified explanation of investing options for retirement? Like the different type of mutual funds and ETFs and whatever else there is? I *just * finished paying off all my student loans, and now I need to start investing and no idea what to do.

Hello, I'm Kumiko, but everyone just calls me Miko. Welcome to my blog, The Budget Mom. I am an Accredited Financial Counselor® , and mom to a rambunctious boy. Come along with me as I strive to live a life I love on a budget that I can afford. Read more about me.

RECENT YOUTUBE VIDEO

Free Resource Library

Recent Posts

  • Should I Go to Grad School? 5 Things to Consider First
  • The ONLY 3 Reasons to Touch Your Investments
  • Explained: The Surprising True Cost of a Speeding Ticket
  • How to Avoid Budget Burnout: 5 Tips to Stay the Course
  • 17 Things That Are Better to Buy Used Instead of New

Blog Categories

Amazon Associates Disclosure

The Budget Mom, LLC is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com.

About

  • Home
  • ABOUT TBM
  • Contact
  • Start Here

Important

  • DISCLAIMER
  • PRIVACY POLICY
  • Subscribe

Favorites

  • YouTube
  • Blog
  • Live Rich Planner
  • Budget by Paycheck

Start With My Friday Newsletter

Copyright ©2021, The Budget Mom®
This website contains affiliate links, which means that if you click on a product link, I may receive a commission. This website is a participant in the amazon services llc associates program, an affiliate advertising program where I earn advertising fees by linking to amazon.com.