There are so many options available for investing for retirement, which is amazing, of course, but it can make investing even more daunting, especially for those just starting out.

With so many options available, it's essential to find a strategy and fund that aligns with your goals and risk tolerance. 

If you’re exploring your savings goals, risk tolerance, and are feeling ready to invest, a target date index fund may be the right product for your investment portfolio.

Understanding Target Date Funds

So what is a target date fund? A target date fund is a fund that contains multiple funds. Now stay with me here. It is one fund that usually contains a Total US Stock Market Fund, a Total International Stock Market Fund and a Bond fund. A whole bunch of greatness and diversification by buying one thing!

The name "target date fund" comes from the fact that these funds have a specific target date, which is usually your expected —or targeted— retirement date. A target date fund works by automatically adjusting its asset allocation (aka those funds mentioned above) as you approach your retirement age. Errr what does that mean, Amanda??

Think of it as like the thermostat of the investing world. It keeps things from getting too hot or too cold.

The goal here is to gradually transition from a more aggressive investment approach to a more conservative one. 

In the early years of your career, when retirement is still far off, you can be a little more aggressive in your investment approach because if there happens to be a lengthy market downturn, you have time to recover. You’re not pulling from it, so it’s all good! You are in the wealth accumulation stage of your life. This is to say, you want a higher allocation of growth-oriented investments like stocks.

When you get older though, and you’re close to retirement, you start reaching the wealth preservation stage of your life. You’re not worried as much about growing your portfolio as you are about keeping what you have. This means you may want fewer stocks — you wouldn’t be in a great place if the market has a big downturn because you’ll need to be pulling money from that account.

The cool thing about a target date fund is that as that target date draws nearer (aka that retirement date), the fund automatically reduces its allocation of stocks and increases its allocation to more conservative assets like bonds. 

This transition reduces your portfolio’s exposure to risk as you near retirement. 

The key advantage of a target date fund is that it automatically rebalances, which saves you the hassle of constantly monitoring and adjusting your portfolios. It’s about as hands off as you can get!

Selecting the Right Target Date Fund

Now we have target date funds and target date index funds. Target date funds tend to have higher fees than target date index funds due to the hands off nature of it. I know, I know, can’t they make anything easy?! If you have access to target date index funds, that’s the way I’d go as even something like a 1% fee can eat into your wealth over time. We want the lowest fees possible and target date index funds give us that; typically under .25%.

To figure out what target date fund or target date index fund you should invest in, select the one that matches the year you expect to retire. Don’t know when you will retire? Traditional retirement age is 65. So if you're 30 years old, you would select a target date fund with a retirement target of approximately 35 years in the future.

[retirement age] - [current age] = target date fund to choose

65 - 30 = 35 years in the future

If your year falls “between” the years offered —for example, your year is 2057 — you can pick either the 2055 or 2060.

There’s no right or wrong answer here and you can always adjust in the future if you need. 

Below are some common target date index funds at three popular brokerage firms.

A Hands-Off Approach to Retirement Planning

Many people like these for their retirement since it's really hands off.

If you're someone who wants to be more aggressive and not have such a large percentage of bonds in your portfolio, you could build out your own.

Just make sure to remember to keep an eye on it as you approach retirement in case you need to change your strategy. You don't want to be in a position where you have to take money out at a loss!

And also watch out for those FEES. Look for target date index funds vs target date funds as they tend to have much lower fees. If your 401k plan at work though doesn’t offer that, it’s ok, but just try to keep the fees as low as possible.

Fewer Emotional Investment Decisions

Investing can be an emotional rollercoaster, especially during periods of market volatility.

The automatic rebalancing of target date funds is a good option for most people’s retirement accounts in my opinion! You leave the emotions out of it and it does its thang.

Since target date funds automatically rebalance your portfolio, you can rest easier knowing that as you near that targeted date, your portfolio is more likely to recover than if you emotionally swung your investments from more conservative to more aggressive and vice versa. 

Wrapping Up

If you’re thinking about adding a target date fund to your portfolio, consider your risk tolerance and how hands-on you want to be with your investments. Target date funds provide an accessible and hassle-free solution to long-term retirement planning. But this is not always the right approach for everyone. If you can handle more risk and want a more hands-on approach to your investments, this may not be for you. 

I like this fund because it’s a hands-off way to build wealth. You can set it and forget it. 

Want to learn more about what to buy as part of your investment portfolio? Check out my Investing & Retirement course.