What are Target Date Funds?

Target date funds are mutual funds utilized by those planning for their retirement. With target date funds (i.e. life-cycle or age-based funds) the asset mix which consists of stocks, bonds, and cash equivalents becomes more moderate as the target date approaches. That is because as retirement comes near, the possibility of work based generated income decreases and the available resources need to be preserved for the golden years.

Target dated funds are actually fairly new in the marketplace as they were first introduced in the 1990s. Their popularity has increased especially with the uncertainty of Social Security, a reduction of pension plans, and with a large aging population planning for retirement who are concerned with their future. Target date funds are appealing to those planning for their retirement as they hold a healthy mix of growth security, such as U.S. and international equities while additionally guaranteeing the original investment. The key is that the fund is held onto until it reaches its full maturity level.

There are some negative factors to target date funds, individuals must consider before putting their cash into that type of investment. Fees for target date funds may be high, your money can be tied up for decades and you cannot access it without risking large penalties; and there is a not a lot of options for this market.

The advantage of a target date fund is that it is simple to purchase. Just choose your retirement date and the money manager does the rest of the work for you until the investment reaches maturity date. However, if you are a person who wants to take the bull by the horns when planning your retirement and your financial future, this may not be the investment plan for you. Target date funds are inflexible and don’t allow for any creativity when it comes to long term planning.