Millennials born in the early 1980s to mid-1990s are beginning to enter middle age and their peak earning years. This generation ent🦩ered the workforce around the time of the Great Recession and has faced barriers that include a hefty student loan debt burden, the COVID-19 pandemic, and an increasing number of natural disasters♒. As a result, they may experience many obstacles in securing their retirement.

Target date funds may provide a helpfཧul and convenient option for those who find saving for r✅etirement difficult or daunting.

Introduction to Target Date Funds

Target date funds, also known as life-cycle funds, aim to manage risk on behalf of investors to ensure that their retirement savings are protected as the date of retirement approaches. These funds are typically labeled by the intended year of retirement—such as a “2055 Fund”—and use what is known as a 澳洲幸运5官方开奖结果体彩网:glide path to sh🐎ift exposure from higher-risk, potentially higher-reward asset𒈔s to lower-risk ones over time.

Target date funds are usually mutual funds that hold a combination of stocks, bonds, and othe♔r investments. Over time, the managers of these funds shift the allocation of these various asset types toward a more conservative approach. For instance, they shift from a more stock-heavy portfolio when retirement is still decades away to a fixed-inc🌱ome or cash-equivalent-heavy portfolio in the final years before retirement.

A goal of these funds is to bet on relatively riskier assets earlier in the investor’s career, in order to capitalize on the possibility of higher returns when there is still time to recover from potential market declines. Then, as retirement nears, a target date fund works to protect the investments accumu🌜lated over time from sudden market volatility or other factors that might erase returns at the last minute.

Benefits of Target Date Funds for Millennials

Target date funds offer a variety of advantages for those interested in saving for retirement. These include:

• Automatic asset allocation: Target date funds remove all the work of managing risk. You simply contribute to the fund, and the fund managers automatically shift the asset allocation over time in line with the overall goals of the fund and the intended retirement date. If you don't have the time or interest to participate actively in the investment process, this makes target date funds an excellent choice.
• Simplification: Because target date funds tend to be broadly diversified mutual funds, they can be considered a single investment vehicle in your retirement planning. Unlike individual stocks, bonds, exchange-traded funds (ETFs), or other assets, which investors may need to monitor, buy, and sell regularly, target date funds are very straightforward.
• Risk tolerance is factored in: Many target date funds allow investors to specify their relative level of risk tolerance and adjust the glide path accordingly. If you are comfortable with a greater level of risk, for example, a higher percentage of the portfolio may be allocated to stocks.
• Long time horizon: By definition, target date funds consider long time horizons when making allocations. The oldest in this generation still have decades until retirement age, making these funds a strong choice given this time frame.

Riꦗsks and Considerations of Target Date Funds f⭕or Millennials

It’s important to be aware of some risks and other considerations before you begin investing in a target date fund. These include:

• Misalignment of risk tolerance or investment goals: There is a risk of target date funds oversimplifying the retirement planning process for some investors. It’s important to consider the specifics of a fund—where does it invest funds, exactly how does it shift asset allocation over time, and so on—and compare those against your own level of risk tolerance and your financial goals.
• Fees: While it can be tempting to set up participation in a target date fund and put it out of mind, you should also be aware that different funds may have fees that must be paid periodically. These may be for the fund itself or, occasionally, for other mutual funds in which the target date fund invests.
• No guarantee of success: Just because a target date fund is designed to adopt a more conservative approach as you approach retirement, there is no guarantee that it will successfully protect retirement savings at that point.
• Limited agency: By choosing a target date fund, you remove the option of controlling aspects of an investing approach, which may be important. If you have a particular focus—for instance, you might wish to invest only in stocks meeting certain environmental, social, and governance (ESG) metrics—you may not be able to specify that preference when using a target date fund. You may also wish to have a fund that is actively managed by a professional, even if you wish to take a hands-off approach. Increasingly, a variety of target date funds do incorporate these kinds of investing preferences and strategies, though you may have to hunt for them.

Factors to Consider Whe🅺n Choosing Target🍌 Date Funds

If you've decided to use a target date fund, there are some key considerations to keep in mind before initiating an investment. The most important of these may be the target retirement date itself.

Other considerations include 澳洲幸运5官方开奖结果体彩网:expense ratios of the fund and any constituent funds, overall fund performance (particularly as it compares to other target date funds operating on the same time frame), and which funds are available through your particular investment manager.

Comparing Target Date Funds to Other Options

Retirement planners may weigh target date funds against other investment options, such as individual stock invesꦡtments, robo-adﷺvisors, and traditional retirement accounts. The choice often comes down to how actively you wish to participate.

Index funds and related products are somewhat more involved, as you'll need to determine which funds to focus on and how to allocate them over time.

Individual stock investments represent the opposite end of the spectrum and might be appealing if you're looking to be more actively involved in determining how your money is allocated.

One popu༺lar🌞 alternative to target date funds if you have decades until retirement is to focus on a growth fund instead.

, a financial planner for Lighthouse Financial in Arkansas, points to a case in which a you might choose between a target date fund, large-cap growth fund, or S&P 500 index fund. Kennedy notes that most target date funds "range from 0.5% all the way up to 1% or more" in internal costs, while growth funds might cost "below 0.1%." A typical expense ratio for an index fund may be 0.1%, although some are much lower.

So, someone with retirement decades away may "opt for a growth-oriented investment mix for the foreseeable future," Kennedy says, making one of those growth funds a comparable option to target-date funds over the short term. He adds that someone considering between the two may "have a much better opportunity to outperform their respective target date fund opting for a simple growth fund" until it comes time to shift to a more conservative allocation many years down the line.

Common Misconceptions About Target Date Funds

A common 🐟misconception about target date funds is that funds with the same target date but offered by different providers are the same. On the contrary, target date funds with similar dates are likely to hold different allocations and types of assets.

For example, in most cases, a target date fund 𝓰offered by a particular provider will include mutual funds only offered by the same provider. In contrast, others will hold various U.S. equity, foreign equity, and bond funds offered by the same provider.

Another misconception about target date funds is that the allocations will be changed frequently. As Kennedy points out, most people can select a growth fund and make “updates to the investment mix...as retirement approaches in 20 to 30 years.” The impact of not changing asset allocations significantly in the short term may be minimal, particularly considering t🦩he relativ🌺e cost difference between growth and target date funds.

Most investment management firms offer target date funds. Besides Vanguard, Fidelity, and T. Rowe Price, others include TIAA, BlackRock, State Street, JPMorgan Chase, and many more. The best target date fund for you may depend on whether you have a preference among these and other fund managers. Beyond that, this generation is likely targeting retirement dates of roughly 2045 through 2060, so choosing a fund with the appropriate tim♒e horizon is essential.

Next, it will be helpful to consider expense ratios across different comparable funds, as well as the assets that make up the portfolio and how you might expect them to🍰 shift over time.

The Bottom Line

Target date funds begin with a higher concentration of riskier assets like stocks and shift toward a ✤more conservative approach as a target retirement date approaches. These funds may appeal to investors for their ease of access, as they allow them to make contributions and leave the rest of the fund management process up to professionals. However, they tend to have higher expense ratios than growth index funds, which may provide a similar performance and risk level for much of an investor’s career.