Is a Target-Date Fund the Best You Can Do?

It's easy to default to target-date funds, but is that the best you can do? | Investing Minute Newsletter |

Is a Target-Date Fund the Best You Can Do?

We've all been there—stuck in the chip aisle, unable to pick a flavor. Before you know it, it's been 15 minutes, and you're still sweating your decision. Who knew a bag of chips could trigger such anxiety? If you get hung up on something as simple as chips, try choosing between retirement funds. When you can't make heads or tails out of your options—and your future depends on it—the pressure really cranks up. No wonder so many folks default to target-date funds. It's just easier. But is that the best you can do?

Easy Does It? With a target-date fund, there's no stressing over fund choices. You simply pick the fund that corresponds to the year you plan to retire. For instance, if you're 40 years old and plan to retire in 25 years, you'd go with a 2040 target-date fund. Target-date funds adjust your risk down gradually as you age. The younger you are, the more aggressive your investments. As you rack up birthdays, your investments grow more and more conservative. By the time you retire, your portfolio has a heavy mix of money markets and bonds. This idea—called asset allocation—may sound good in theory. But it could keep your nest egg from reaching its full potential. Let's compare two scenarios to see the difference. In this example, Jill and Kate start investing at age 30 and contribute $250/month to a Roth IRA. Jill puts her money in individual growth stock mutual funds, while Kate invests in a 2050 target-date fund. Both investors come out of the gate with a similar strong start. But over time, Kate's retirement fund starts falling behind. By the time they retire 35 years later, Jill's nest egg has a $200,000 advantage over Kate's. And that's because of a mere 2% difference in return in the last 15 years.

Retirement Isn't the Finish Line Maybe you're okay trading savings today for security tomorrow. But your investments don't have to stop growing just because you retire. Your golden years could last another 20–30 years. Giving up on risk at this stage could mean giving up on returns that can sustain you through retirement. Sure, you'll start dipping into your nest egg to cover life expenses. But the money that's left can still harness the power of compound interest. And this is where individual investments shine. Let's assume Jill and Kate retire in 2050 and take out the equivalent of $25,000 in today's dollars from their Roth IRAs each year. Even with those modest withdrawals, Kate's retirement fund becomes a goose egg in just 13 years. Jill's, on the other hand, continues growing for 16 years and still has a big chunk of money left after 30 years.

A Simple Strategy That Leaves You in Control Target-date funds aren't the worst way to invest your money, and they're certainly better than not investing at all. But you can do better. Dave's biggest beef with target-date funds is simply that you put your future in someone else's hands. Investing isn't a one-size-fits-all venture. You should feel confident your money's going to work for you in retirement. So does that mean you have to fly solo? Nope. There's a middle ground that gives you power over your portfolio without having to figure it all out on your own. It's as simple as sitting down with an investing pro that you trust. Don't settle for a know-it-all who tells you what to do and where to put your money so they can cash in on your success. You deserve to be treated like a partner, not a paycheck. A good advisor works closely with you to build a plan that fits your goals for the future. It's not a one-time conversation. It's a proactive relationship that keeps an ongoing eye on the prize. You decide if and when to adjust your risk based on their professional advice. If you'd like to be the expert in charge of your future, we can connect you with an investing advisor Dave trusts to be your guide.

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