Target Date Funds
Target date funds are a class of asset allocation funds that adjust the investment ratios to reduce risk as the horizon date nears. The horizon date could be the anticipated date of retirement or some other long term goal such as a child’s college start date. There are various options within the dated funds: actively managed, index-based, blend, and types of assets (stocks, bonds, mutual funds, government securities, and sustainable investments/ESG- environmental, social, or governance). Fees and expenses will vary with the structure of the portfolio and will affect the total rate of return. If the target date fund is held in a retirement account (401K, 403B, Roth or Traditional IRA) or a 529 Educational Plan, the account will have tax-deferred or tax-free growth. If if is held in a taxable account, income and capital gains taxes may be incurred.
I selected “Target Date” funds for a small part of my investment selections without fully understanding how most are structured. I created a “ladder” of multiple dated funds thinking that the allocation of a funds investments would all be in conservative money market or bond investments at the “payout/retirement” date. I wanted to have some growth in those funds so I selected different dated funds to have different investment allocations.
To illustrate retirement portfolio allocation through the various stages of a person’s career timeline: I am including some images from my educational files. Vanguard historically has had some good graphics on investment stages and investment allocation for retirement planning.
What I discovered when I was researching my allocations is something called a “glide path.” Many company’s target date retirement funds have a “retirement date” in the title, but the portfolio allocation is still adjusting for another 7 years to reach the final allocation goals. My original plan of using the different dated funds would have worked if the glide path for my funds was a “to” versus a “through” glide path. A “to” glide path is used by a fund that reaches its lowest equity allocation at the target date and then maintains that ratio for remainder of the funds duration. A “through” glide path maintains a higher equity ratio and continues to reduce the ratio for an additional period after the horizon date to continue some growth in the portfolio to maintain a longer income stream. Below are some glide paths from different fund companies. Note: check your company’s website for current information – many companies have recently changed or are currently readjusting the glide path to account for longer lifespans in the asset allocation ratios.
At this time, I am keeping my different target date funds while I am adjusting my portfolio as they are only a small portion of the account. The general consensus from most fund companies and financial advisors is not to not create a “ladder” of target date funds and just invest in one that matches your desired investment ratios based on its glide path – usually or at your horizon date or 5 years later.