A target-date fund is an investing tool, often in the form of an ETF or mutual fund, that adjusts its investment strategy based on how much time there is until the target date. The investments are strategized for long-term growth when you are further away from the target date and strategized for wealth preservation the closer you get to it. Another name for these kinds of funds is age-based funds and life-cycle funds, and they are structured around the financial needs of someone aiming to save for retirement.
The benefit of target-date funds is that they can be hands-off and are usually designed to adapt their investment profiles over time. When there is a long time until the target date, they start investing aggressively to grow, but as they get closer to their target date, they begin to rebalance toward assets deemed more conservative. This is to ensure your nest egg stays secure and isn’t hit very hard if the market drops at a time when you need it.
Many target-date funds are held via IRAs, 401(k)s, or other similar retirement accounts given that the investment strategy is tailored for retirement. Retirement accounts such as traditional 401(k)s have the advantage of being only taxed once your money is withdrawn. If you are investing in a target-date fund without using your retirement account, you’ll be taxed twice; once when you receive your income from your employer (income tax) then again after you invest in the target-date fund and must withdraw it again (capital gains tax).
Another factor to keep in mind with target-date funds is that they are not created the same. Each issuing company will have its own portfolio designed with different fees, strategy execution, advantages, and disadvantages. It can be important to look at the specifics of the fund you’re interested in to make sure that it matches your preferred investment strategy.
Overall, target-date funds can be helpful for a turn-key retirement investment solution, but they may be somewhat generic. Relying on them may not cover all your retirement investment needs. So, make sure you do your research before jumping in!
If you’re wondering how target-date funds may be used in your retirement strategy, contact us to take the first step toward enhancing your financial picture. Reach us at (540) 720-5656 to get started with a financial professional.
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Megan Jones joined the ILG Financial team in 2020 as marketing director. Megan and her husband live in Fredericksburg, VA with their German Short Haired Pointer, Gus. Megan is a graduate of Longwood University and holds a degree in communications. Megan is the oldest of Dave Lopez’s three children and not only enjoys working alongside her father, but also with her cousin, Chase, who joined the ILG Financial team in 2020 as an advisor. Megan is also a fully licensed Life, Health, and Annuity agent. When not at work, Megan enjoys sitting on the back porch with family and friends enjoying food and music.
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