Target Date Funds can be a useful investment strategy during one’s retirement accumulation phase when they are saving for their retirement needs. The general objective of a Target Date Fund is to match the investor’s retirement date with the corresponding Target Date Year of the fund. The further out the target date year, the more aggressive the fund allocation will be. Over time, the fund will de-risk as the target date approaches, thus reducing risk as the investor gets closer to their desired retirement date.
However, once the investor reaches the targeted date, the fund typically remains “stagnant” and more conservative, since it is assumed, a retiree may not be able to tolerate a higher risk allocation. This may not be the case for retirees who may have other assets to draw from (such as pension income or non-retirement assets) or for investors who have other longer-term investment goals, such as legacy planning for the next generation. In addition, the risk level of the target date fund may not fit the needs of someone who plans to retire earlier or later than normal.
Therefore, it is important to understand the investment objectives of the Target Date Funds, the projected glide path, what happens once the target date is reached, and more importantly, your longer-term investment goals and risk tolerance.