Target-date funds offer hands-off retirement investing

A target-date fund simplifies your investing for retirement in two ways. First, it enables you to get all of the diversification you need in a single fund. Second, the fund maintains an asset allocation that’s geared to the year you plan to retire (the fund’s “target year”), meaning that you don’t need to spend time and effort researching investments and creating an allocation that’s appropriate to your goals. Basically, a target-date fund offers you hands-off investing. Many workplace retirement plans, such as 401(k), 403(b) and 457 plans, allow plan participants to choose a target-date fund as an investment option.

As a fund’s target year draws nearer, its managers gradually move fund assets into more conservative investments. This progression toward less risk, known as the fund’s “glidepath,” is based on the idea that the closer you get to retirement, the more conservative an investment posture you should typically assume.

Choosing a target-date fund that matches your time horizon to retirement is easy, because the target year is identified in the fund’s name. For example, if you plan to retire in 2050, look for a fund with “2050” in its name. But don’t choose a fund based solely on its name or target year. Although target-date funds are well diversified, be sure that any fund you’re thinking of investing in aligns with your tolerance for risk. You should also be comfortable with the glidepath described in the fund’s prospectus or on its website.

If you decide to invest in a target-date fund, it’s important to consider other investments you may hold. Otherwise, the asset allocation you get with the fund might be skewed by other investments in your nest egg.

Once you invest in a target-date fund, plan to revisit the fund at least once a year to make sure it continues to follow the glidepath for which you signed up. Also, each fund reports its asset allocation in shareholder reports, which are updated twice a year.

To learn more about target-date funds and whether such a fund might be a good fit for you, contact your EY Navigate financial planner.