Why a Target-Date Fund Works for Me

I don’t ignore my retirement accounts, but I consider myself mostly a set-it-and-forget-it investor. I prefer to pick an investment strategy, arrange automatic contributions and then sit back without tinkering much with my portfolio. For that reason, I used a target-date fund in my 401(k) when I had one (I’m self-employed now). My husband invests in a fund with a 2050 target date through his employer plan.

A target-date fund aims to create an appropriate investment mix for the investor’s age and approximate retirement date. A fund designed for someone with many years until retirement includes a high proportion of stocks for growth. Over time, the fund regularly rebalances, allocating a greater percentage of assets to less-risky, income-producing investments, such as bonds, as retirement nears.

We’re far from alone in our preference for target-date funds. Among 401(k) participants in their twenties, 54% of their assets were in target-date funds at the end of 2019, and investors in their thirties had 45% of assets in target-date funds, according to a study from the Investment Company Institute and Employee Benefit Research Institute. Many large employer plans automatically enroll employees and use target-date funds as the default investment choice.

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Evaluating Your Plan.

Target-date funds are attractive for their simplicity. But if you’re dissatisfied with your plan’s target-date offerings or have the appetite to construct a customized portfolio, you can typically select among a menu of several other investment options. If you have decades to go until retirement, you may want to dedicate 80% to 90% of your portfolio to stocks. Individual needs vary, but as an example, a millennial might choose 40% large-capitalization stocks, 20% mid-cap stocks, 10% small-cap stocks, 10% international stocks and 20% short- to mid-term bond funds, says Melinda Satterlee, a financial planner in the Seattle area. Include both growth-oriented and bargain-price stocks.

If you go the do-it-yourself route, periodically check your portfolio to ensure the asset allocation is on point. Actively managing your investments calls for greater ability to keep your cool when the stock market dips. “The goal is to buy low and sell high, but our brains are wired to do just the opposite,” says Tara Unverzagt, a certified financial planner in Torrance, Calif. If you want help choosing and monitoring investments, see whether your plan provider offers advisory services or consider hiring a financial planner. You can find one who works with millennials at www.xyplanningnetwork.com.

If you stick with a target-date fund, occasionally review whether it’s still a good fit. As retirement approaches, you may gain assets in other accounts, creating a need for a tailored blend of investments to keep your overall allocation on track. As your target-date fund’s asset allocation shifts, judge whether it matches your risk tolerance. If you’re an aggressive investor, for example, you may find that your portfolio’s stock allocation diminishes more than you’d like as time passes. You could switch to a fund with a target date further into the future or add stock funds to the lineup.