Can target-date funds help grow your financial garden?

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Spring is here! As the flowers start popping up in my garden, I can’t help but make parallels to the importance of tending my financial garden, as well.

Gardening and planning for retirement both benefit from starting with a plan, providing some ongoing maintenance and then enjoying a harvest in the future. One tool you can use to accomplish portfolio planning and maintenance needs in your retirement accounts is by using target-date retirement funds.

According to Vanguard’s “How America Saves 2020,” about 94% of retirement plans are offering target-date funds and about 78% of retirement plan participants are using these funds.

So what are target-date funds and why are they such a popular choice?

A target-date fund is a type of mutual fund that offers a one-stop investment solution with broad diversification among equity and fixed-income market sectors that is designed to become more conservative as you near your identified retirement year.

Target-date funds are appealing to investors because of the way the funds simplify retirement planning. You just need to know when you think you’d like to retire. Then you select a fund that ‘targets’ that retirement date. Target-date funds restructure every so often to gradually reduce risk as the targeted retirement date nears.

Target-date funds are an attractive option for investors who do not want to be actively involved in picking assets or adjusting their mix between stocks and bonds over time. Target-date funds do this for investors by determining the appropriate risk level based on the investor’s current age and when they anticipate retiring. It can be nice to have retirement investing on autopilot through payroll deduction and a single self-maintained investment option.

However, as with any investment tool, there are things you should consider when choosing to invest in a target-date fund. It is important to make sure that the fund selected is aligned with all your long-term goals and that you are at the proper risk level at any given time.

Target-date funds start very aggressively for young investors, often allocating as much as 90% to stocks. Target-date funds can be riskier than many investors would expect in the early years, but they usually become less volatile as the target-date approaches.

Can you feel comfortable with that level of risk in the beginning? While it is fun to think about the potential upside of a high stock allocation, it is also important to realistically consider the downside. For example, if my portfolio went down by X amount, would I worry? If the answer is no, then you are still in your comfort zone. If the answer is yes, then you may want to talk with your financial adviser to see if an adjustment to your allocation makes sense.

Also, not all target-date funds have the same transition points to become more conservative over time or how they allocate your portfolio after you retire. Some target-date funds hold the mix between stocks and bonds constant during your retirement years, while others continue their glide path, or investment roadmap, to becoming more conservative over your retirement years.

Finally, target-date funds don’t automatically adjust to changes in your goals, needs or life circumstances. For example, if you decide to retire earlier than planned. These types of changes may necessitate moving into a different type of investment fund.

As always, it is important to examine the specific fund you are selecting and speak with a professional adviser to determine whether target-date funds are a good fit for you and your goals.

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