What is a Target-Date Fund?
A target-date fund is a type of mutual fund or exchange-traded fund (ETF) that automatically adjusts its asset allocation based on a specified target retirement date. These funds are designed to simplify retirement investing by providing a diversified portfolio that gradually becomes more conservative as the target date approaches.
Target-date funds typically have a year in their name, such as "Target Date 2045". This year signifies when the investor intends to retire. In the early years, the fund allocates a higher percentage to growth-oriented assets like stocks. As the target date nears, the fund shifts towards income-generating assets like bonds to reduce risk and preserve capital.
Benefits of Target-Date Funds
- Built-in Diversification: They invest in a mix of asset classes, offering broad market exposure.
- Automatic Rebalancing: The fund adjusts its allocation without the investor needing to actively manage it.
- Simplicity: Ideal for investors looking for a hands-off approach to retirement savings.
Considerations
While target-date funds offer convenience, it's essential for investors to review fund fees, underlying investment performance, and whether the chosen target date aligns with their retirement goals.
Overall, target-date funds serve as a practical solution for long-term investors aiming for a streamlined and effective path to retirement savings.