Target date funds are a retirement savings option that is very popular among employers. In fact, your employer probably provides this option, which is characterized by a diversified investment portfolio designed to achieve an objective for growth based on a specific future date. That date will be the year you turn 65. For example, if a fund’s target date is 2030, that means that the investment product is designed and suitable for a person who turns 65 that year.
Who is this type of investment for?
“Target date funds are balanced mutual funds. That means they have exposure in several kinds of assets, like stocks, bonds, and cash. They create a diversified portfolio with a single instrument. Each of these balanced funds has a strategy or risk profile based on the year the individual will retire. As that date approaches, the portfolio becomes more and more conservative, in an attempt to reduce risk,” explained Carlos G. López Pierluisi of Banco Popular’s Wealth Management Division.
This product might be an option for individuals who don’t follow the stock market or who simply prefer for an analyst to manage their portfolio. Each year, as the retirement date approaches, an adjustment is made so that the fund becomes less aggressive.
Target date funds are designed so that at retirement, money begins to be withdrawn little by little. “If the person retires at 65, she or he will probably live twenty or thirty more years. That means that they might still have funds with exposure in stocks so the portfolio will regenerate, to keep pace with inflation,” López Pierluisi went on.
In planning for retirement, the future retiree should consider diverse sources of income, such as Social Security, savings accounts, and a range of retirement products. Keeping all the possible sources of income in mind will allow you to plan better and decide which product is best suited for you.
Pros and cons of target date funds:
- You get a diversified portfolio in a single product, and a manager is tasked with choosing the appropriate type of asset, sector, and industry, in keeping with the strategy.
- An analyst will rebalance the fund for you, following the optimum strategy for your retirement age.
- This product usually has a higher cost, due to the analyst’s increased efforts in managing the fund.
- Choosing the right fund could be a challenge if you aren’t sure what your retirement year will be and/or if you want to withdraw your money all at once.
- If you decide to retire before reaching 65, or to receive all your money in a lump sum when you retire, consider making readjustments to your investment portfolio. Also your goals and needs may be very specific to you, in which case you will need to revise your plan if your retirement date changes.
Contact your employer and discuss whether this type of fund is for you. For more information, consult a professional who specializes in managing investment products. You can also visit popular.com/401k, where you’ll find a number of investment options.
The information and general descriptions contained in this article are designed to help you understand about the factors that you should generally consider when evaluating the appropriateness to your retirement plan of any strategy or investment. Any descriptions herein are solely for informational and educational purposes and for your independent consideration; they are not intended to be regarded or construed as advice or a suggestion for you to take (or refrain from taking) a particular course of action. In providing this information, we assume that you are capable of evaluating the information and general descriptions contained herein and exercising your independent judgment. This document was prepared for informational purposes only and should not be considered as an advice of any kind. Banco Popular de Puerto Rico, its subsidiaries and/or affiliates are not engaged in rendering legal, accounting, or tax advice. Should legal, accounting, or tax advice be required, the services of a competent professional should be sought. Investment products are not insured by the FDIC, are not deposits or obligations of and are not guaranteed by Banco Popular de Puerto Rico or its subsidiaries or affiliates, and may lose value. Insurance products are not insured by the FDIC or other government agencies, are not deposits or obligations, and are not guaranteed by the Bank or its subsidiaries or affiliates. Some insurance products may lose value.