What is a Target Date Index Fund and Why Should You Have One?
One Investment For Life?
|I was very intrigued when I heard “Retired at 36” Jeremy Schneider tell So Money‘s Farnoosh Torabi that he believes we literally could have essentially one investment. One. For life.
Torabi: “Is it to assume that all we need is one Target Date Index Fund? You know, this idea that you need this like, multi-faceted portfolio. What’s your? Where do you stand on that? Could we just do this and ride it out?”
Schneider has long been a fan of simple investing, telling NextAdvisor,
if he could start over, he would “put everything into a Target Date Index Fund.”
“The target date index fund is actually, truly the most optimal, simple, low-cost investment strategy,” Schneider tells NextAdvisor.
Schneider says he mitigates his long-term risk, which many investors want to do, by choosing target-date index funds, which are routinely managed to steadily reduce risk as you near retirement.
What Is a Target Date Index Fund?
So what is a target date index fund and why does Schneider literally think you could put all of your money in this and let it ride?
FINRA defines a Target Date Fund as:
“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.” The closer a fund gets to its target date, the more it focuses on assets that traditionally have a lower risk profile, such as fixed income, cash and cash equivalents. This shift across asset classes is called a “glide path.” A fund’s glide path is designed to reduce investment risk over time—but glide paths can vary considerably from fund to fund.”
If you have heard personal finance advice about a diversified portfolio, well, essentially you are getting one with this easing of a mix of higher risk assets into a lower risk profile.
Target date funds are typically structured as a mutual fund. Most target date funds are actually a “fund of funds.” They are really investing in other mutual funds, not individual securities. You are getting a great mix of stocks with this type of product.
Schneider told Torabi on “So Money” that he would actually choose the target date as the date you anticipate dying, not the date you anticipate retiring.
A target date index fund is a type of mutual fund that becomes more conservative as it approaches its target date. This type of fund is perfect for investors who want to achieve a balance between growth and stability.
Why a Target Date Index Fund?
Target date index funds are a great way to invest for both growth and stability.
The average target date index fund has a return of about 7-8% per year.
Schneider says he doubled his money in seven years. Not bad for set it and forget it, right?
Target date index funds are perfect for investors who want to achieve a balance between growth and stability. These types of funds are becoming more popular among beginner investors because they offer a simple and convenient way to invest for the long term.
While target date index funds do have fees associated with them, these fees are typically lower than those of actively-managed mutual funds.
Target date funds charge expense ratios that can be as high as 1%. Some target-date funds investing in only low-cost Exchange Traded Funds, or ETF and have expense ratios as low as 0.1%.
There are many different target date index funds available, so it is important to choose one that aligns with your investment goals.
How Do You Get a Target-Date Index Fund?
So you want to start investing in a target date index fund.
Many brokerages offer this product.
Here are a few target date index funds that may be right for you.
Fidelity Freedom Index 2060 Fund (FDKLX)
This fund allocates 90% to equities and 10% to fixed income.
Forbes reports the current allocation of this fund is 50% stocks and 505 fixed income. There is a 5-year trailing return (What even is that?) of 5.16%. Trailing returns measure how well a fund performs over a specific time period. The expense ratio is 0.12%. Passively managed and actively managed.
Vanguard Target Retirement 2060 Fund (VTTSX)
This fund allocates 90% to equities and 10% to fixed income. It has diversity at a low cost with just a 0.08% expense ratio and a 5-year-trailing return of 5.12%.
JPMorgan SmartRetirement Income Fund (JSRAX)
The 5-year is 10.24% and the expense ratio is 0.34%. This fund invests in a combination of equity, fixed income, and short-term mutual funds.
T. Rowe Price Retirement 2060 Fund (TRRLX)
This fund has an expense ratio of .64% and a 5-year trailing return of 5.36%. Although fees are higher, it has 6.78% 5 year performance.
Whether you are investing in individual stocks and bonds, saving for retirement, or buying a sandwich, remember: It’s YOUR money and YOUR life.
Ask questions. A lot of them. If you find you are not getting your questions answered or someone seems uninterested in answering them, go somewhere else or speak to someone else.