Target Date Retirement Funds – Defeating the Point
22 September 2006Walter Updegrave (a guy whose column I like a lot) has an article on a person who is mixing her investments between a small cap fund and two target date retirement funds – those funds that are designed to give you a mix of assets appropriate to your age so you don’t have to think about it. If you’re looking for an example, Vanguard has a big list of them here. You just pick the date you want to retire, and as you get closer to that date, they change the mix of fund assets to be more conservative. It’s good for people who don’t want to spend any time at all managing their assets. But as the article points out, if you go with this strategy, ALL your money should be in a single fund with a single date.
Diversifying by having some of your assets in another kind of fund defeats the point, because the fund is allocated assuming it’s all you own. It’s own assets are diversified among various kinds of stocks and bonds according to standard investment rules that you get more conservative as you age. So if you own $5000 in a target date fund, and $1000 in stocks, you’ve got the wrong mix – your portfolio is no longer automatically balanced because 1/6 of it is in pure stocks.
If you’re worried about having all your money with a single place, I’d suggest putting your money in multiple funds at different companies – but with the same retirement date. They may be managed slightly differently, but they’ll have the same rough allocation of assets. But, for example, if you’re retiring in 2030 – all your money should be in this kind of fund with that as the target date.
Discuss this in the Free the Drones forums.
One Response to “Target Date Retirement Funds – Defeating the Point”
September 23rd, 2006 at 11:42 am
Great point. I wrote a similar/related piece on this at: http://retiringearly.blogspot.com/2006/09/lifecycle-funds-for-retirement-careful.html