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Target date funds: good idea or not?

Posted by Cheryl Costa  August 30, 2008 09:57 AM

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I have my retirement fund in a CD which comes due next month. With CD rates being low, I was looking into rolling it over into a mutual fund where you pick the date closest to your retirement date. What do you think of these funds?

You are talking about target date funds. Target date funds have names like:

Fidelity Freedom 2015
Vanguard Target Retirement 2035
T Rowe Price Retirement 2040

Target date funds consist of a diversified portfolio of stocks, bonds and cash. As the fund gets close to its target date, it decreases the allocation to stocks and adds more bonds and more cash. The end result is a portfolio that gets more conservative over time.

The idea is to invest in the fund that most closely matches your planned retirement date. So, for example, if you are 49 now, you will be 65 in 2024. You would probably invest in a fund that has 2025 in its name if you wanted to retire at age 65. Alternatively, if you consider yourself more aggressive than most, you could also invest in a 2030 fund because that fund would have a higher allocation to stocks for a longer period of time. Similarly, if you are exceedingly conservative, you can invest in a target date fund with an earlier "due date".

My opinion of these funds is mixed. If you know that you are the type of person to select funds once and then never re-visit the choice, target date funds might be a good option because it puts your retirement savings on "auto-pilot". In essence, all the future investment choices get made for you.

However, this auto-pilot feature is also what bothers me about target date funds. These funds basically treat all investors the same -- with the only differentiating factor being age. And all investors of the same age shouldn't be treated the same. For example, I am the same age as Melinda Gates. Melinda and I might share a similar investment philosophy and tolerance for risk, but that doesn't mean that our assets should be invested in exactly the same manner. I am stretching this popular analogy a little here, but you get the picture.

As is the case with all funds, beware of expenses because they can vary widely across fund families. You should also look at the composition of several funds with the same target date. You will find that even funds with the same target date can have noticeably different allocations to stocks, bonds and cash. Pick the fund that most closely matches your risk tolerance.

Finally, you need to know that target date funds are not guaranteed in any way like your CD. You could lose money.

This blog is not written or edited by or the Boston Globe.
The author is solely responsible for the content.

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Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

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D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit
Financial Planning Association™ of Massachusetts has 900 members who specialize in the financial planning process. Many of its members engage in philanthropic pro bono work in their communities, recommend legislation, elevate public awareness, promote financial literacy, and advocate for sound economic and tax policies.
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