Target-date funds are designed to help manage investment risk. You pick a fund with a target year that is closest to the year you anticipate retiring, say a "2050 Fund." As you move toward your retirement "target date," the fund gradually reduces risk by changing the investments within the fund.
Let's give target-date funds some credit. For people who aren't going to follow investment markets, learn how to invest, and take a hands-on approach to their retirement, target-date funds are helpful. They're even a smart move for people who are inclined to frequently change their fund allocation inside their 401(k).
The Top Target-Date Funds
Even if you're maxing out your 401(k), if you have a handful of funds, the amount allocated to each might be quite small. Depending on how much you contribute and if your employer matches, it could make sense to stay in a target-date fund for a few years while you build assets.
Nothing special happens with a Target Retirement Fund when it reaches its target date. The fund doesn't stop investing, and you don't need to take your money out of the fund. The gradual move from stocks to bonds simply continues.
The best retirement plans to consider in 2021:
Advantages of Target-Date Funds
You also can open a brokerage account with a fund manager or online broker to shop for target-date funds. Or you can purchase one directly from a fund provider like Vanguard, Fidelity or T. Rowe Price, but there your choices may be more limited.
Vanguard Target Retirement funds are inexpensive, diversified and designed to give you a good, but not guaranteed, investment outcome by some fixed date in the future. They do this by starting with a high equity allocation then dialling down risk by moving more money into bonds as the fund approaches its target date.
Fidelity Balanced
Over the past five and 10 years, FBALX has been one of the best mutual funds in its category; its annualized returns outpace at least 95% of all other so-called balanced funds, which hold roughly 60% of assets in stocks and 40% in bonds.
They Only Work While Working: Target Date Funds are also only designed to be used when accumulating wealth for retirement. Once you reach the date, the portfolio doesn't change into one where you can withdraw from it easily. In fact, you will most likely end up having to sell the entire fund and start again.
Target maturity bond funds invest in bonds that mature in a particular designated year of maturity. Each target maturity bond fund generally seeks to hold the bonds in its portfolio until they mature or are called.
Most target date funds are actively managed, to a degree, meaning their holdings change over time. This means you could face unintended tax consequences if you choose a taxable brokerage account rather than a tax-advantaged 401(k) or IRA.
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