Target Retirement Funds

What are target retirement funds?

Target retirement funds -- AKA lifecycle funds -- are intended to be purchased in a retirement account. At any point in your career, you can buy the same fund because it will automatically get less aggressive (higher bond percentage) as you get closer to retirement. Likewise, the further away from retirement you are, the more aggressive it will be. There is no thinking about how to balance your investments between aggressive and safe -- you just invest money at the pace you are comfortable with.

For example lets say you plan on retiring in 2025. You can buy a 2025 fund in your retirement account on for your whole career -- and you don't need to buy anything else! In the year 1990, the fund would have consisted mostly of stocks along with a small percentage of bonds. In 2020, the the percent of bonds will be much higher and, therefore, your potential gains will be smaller, but so will your potential losses.

Why would I invest a lifecycle fund?

For simplicity and ease. This is about as easy as it gets to invest for retirement. Not only that, it will keep your investments in the right places at the right times of your life. Many of them even automatically roll over into a retirement fund after you retire. Keeping you as far away from the little decisions about your retirement portfolio prevents you from being your own worst enemy.

Which funds should I invest in?

I highly recommend Vanguard because of their extremely low expense ratios. using their website and setting up automatic is very easy. Many 401k plans also have a lifecycle funds in them. Here is an example of a lifecycle fund (new window). My favorite part is that it has a low expense ratio of 0.18%. I would hesitate to pay any more than a 0.4% expense ratio if you have a choice. Sometimes in a 401k you won't have a choice but to pay more. Still, if the expense ratio is above 1%, then your company is not doing you any favors.

If there is a target retirement fund in your 401k, but the expense ratio is high, call your HR department. Let your co-workers know and ask them to call too. Sometimes they will be able to make changes.

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