What are these Target date retirement funds you’ve heard about (or never heard about)? In the last 12 years or so, a couple of companies began (such as Fidelity) introducing these Target funds. Basically, you pick the date you are going to or want to retire, and there is a mutual fund setup that you would buy that changes over the course of the life of the fund to accommodate your risk tolerance. So, let’s say I’m 30 right now in 2008, and I want to retire at age 62 (or 32 years from now), I would pick a target fund of 2040. Initially, the fund would invest more aggressively as I am younger, and then scale back to a more conservative approach as I hit my late 40’s and early 50’s.
A couple of good things about the funds are:
They guarantee to return at minimum your principal investment (your initial investment of money) as long as you keep the fund until maturity (in my case the year 2040).
They manage your assets based upon your age, so all you do is provide the money and sit back.
Now, for the bad:
Their management of your funds comes at a price, which means you will pay much more to have this type of fund, which lowers your return.
This fund will act much more conservative towards the end, then you may have, in order to guarantee less risk and increase liquidity (liquidity here means ability to convert your fund to cash).
What funds do I recommend?
Those offered through T. Rowe Price, Vanguard, and Fidelity.