Target date funds (TDFs) continue to grow in popularity among those saving for retirement. The simplicity of these funds explains a lot of their popularity: They relieve investors of the need to adjust the mix of stocks and bonds in their portfolios as they approach retirement age.
Why choose a TDF
As with other mutual funds, TDFs offer investors convenient access to diversification. Each share of the fund grants an investor part ownership of every security in which the fund invests — and thus exposure to a broad swath of companies, industries and sectors. Holding a range of stocks (aka equities) and bonds in your portfolio helps reduce the likelihood that a decline in value of a specific company, industry or geographic region will negatively affect your performance.
An advantage unique to TDFs is their glide path, or the gradual shift in the fund’s mix of stocks and bonds over time. The glide path is typically anchored around a target retirement date, with a shift to a more conservative allocation — namely less exposure to stocks and more exposure to bonds — as that target date approaches. Stocks tend to produce higher returns than bonds over the long term, but they are typically subject to higher short-term volatility. By automating this shift in allocation, TDFs help investors avoid a situation in which they are left holding more risk in their retirement savings than they should as they approach retirement age.
How to choose a TDF
TDFs operate on the common principle of a glide path centered around the year in which you expect to retire — the name of the fund typically includes this year. But the specifics of the glide path can vary from fund to fund, particularly around the mix of stocks and bonds they hold. To choose the right TDF for you, start by looking for ones with target dates close to the date you plan on retiring, then choose one that matches your risk tolerance.
TDFs can differ in their mix of assets along any point of the glide path, and they can differ in terms of how quickly that mix shifts over time. A more aggressive investor may invest in a TDF that offers more exposure to equities early in their career or may choose one that maintains a higher allocation to stocks at the target retirement date. Funds also vary based on their level of exposure to different sectors of the market and even different types of securities. These factors can affect the level of risk or return you can expect, even if funds share the same target date. Not all investors have the same tolerance for risk, so it’s worth shopping around for one that best suits your comfort level.
State Farm® registered agents are here to help. Reach out to your agent to find out if TDFs such as the BlackRock LifePath® Funds or American Funds Retirement Fund series could work for your financial situation.