Buzz
You might want to reconsider the target-date fund you're invested in, applying a different calculation approach.
In short, target-date funds are mutual funds created by brokers to match your retirement year. They adjust over time, becoming more conservative as you approach your target year. These funds are low-maintenance options for retirement investors.
This makes them ideal for beginners, as I wrote here, but they may not be the best choice for more experienced investors. However, they are “offered by nearly 90 percent of employer-sponsored defined contribution plans,” according to Finra.org.
If you're locked into choosing a target-date fund, be mindful of potential pitfalls. For instance, the asset allocation of the fund may not match your personal risk tolerance—it’s often more conservative than expected—especially if you select the year you plan to retire, as is commonly recommended. (For example, if you're in your late 20s and expect to retire at 65, you might opt for the 2055 fund.)
Rather than focusing solely on the target year, choose the target-date fund that matches your risk profile and investment strategy. For instance, you may encounter different funds with the same target date, but each may have a distinct approach to reaching that goal. Just because the fund name includes a specific year, it might give the impression that it’s the right choice, but that doesn’t mean it’s the best fit for you.
“Target-date funds typically aim to become more conservative as time passes, but the starting and final asset allocations, as well as the rate at which they adjust—referred to as the glide path—can vary greatly from one fund to another,” according to Finra.
Paying attention to the “glide path” is crucial (you should be able to locate it in the fund’s prospectus). “Remember, there’s no one-size-fits-all glide path, and the risk and performance of your target-date fund will likely be influenced by the glide path set for it,” writes Finra.
If you have several fund options with similar target dates, compare their strategies to your risk tolerance and choose the one that fits you best. Also, be sure to review periodically to ensure the fund’s path hasn’t shifted, and that you’re still comfortable with your asset allocation.
And of course, check the fees for each fund. Just because multiple funds share the same target year doesn’t mean they’re identical in structure.
