What Is a Target Date Fund?

fortpitt in Retirement Planning 30 December, 2021

What Is a Target Date Fund?

Target date funds (TDF), also known as life-cycle funds, are a type of mutual fund or exchange-traded fund (ETF) meant to grow assets for a set time frame. These funds combine stocks, bonds, and investments, creating a diverse portfolio that adapts to meet the client’s needs over time.

These funds allow you to take more risks while you’re young and transition to more conservative investments as you get closer to retirement. Once you reach the target date, these funds can become income-generating funds.

Pros of Target Date Funds

There are several pros of investing in target-date funds. One significant benefit is adjusting these funds from potential growth to fixed income or cash equivalent investments.

Target funds also offer:

  • A simple, straightforward way to invest and save for retirement.
  • Several different options depending on your needs — with options like active or passive management.
  • Exposure to a variety of markets.
  • A selection of asset allocation options.

Cons of Target Date Funds

While there are several pros to how target funds work, it’s important to remember that these funds aren’t guaranteed against losses. There’s still a chance that these investments in stocks and bonds could drop in value. These changes can influence whether or not the funds will provide guaranteed income.

Similarly, an individual’s needs and investing goals can change over time. Therefore, the set date might not align with someone’s new needs.

What Is an Example of a Target Date Fund?

Most often, target-date funds are structured as mutual funds. With a mutual fund, the investments vary based on the fund’s objectives — whether that’s through other mutual funds or individual securities.

You could also structure target-date funds through an equity mutual fund, directly investing into stocks and bonds or passively managing the fund.

Should You Invest in a Target Date Fund?

Investing in a target-date fund is a relatively low-risk investment strategy that helps many people save for retirement. Whether or not you should invest in a target-date fund depends on your investment needs and goals.

Working alongside a financial advisor can provide you with clarity on whether a target-date fund is right for you.

Connect With a Financial Advisor Today

Here at Fort Pitt Capital Group, our team of in-house financial advisors is ready to help you manage your assets and reach your financial goals. If a target date fund suits your objectives, we’ll get started on developing a personalized strategy.

Reach out today to get started.

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