Many 401(k) plans hold target date funds as a way to help their employees accumulate funds for retirement. However, as the fund approaches its end date, what is the investor to do? Let’s talk about one particular case, the 2030 target date fund, in this blog.
Before we get into the blog, we are financial planners in Morristown, New Jersey. We’ve written other blogs on retirement that may be useful to you:
Our easy, clear take on the question of if Social Security increases with inflation
End of year financial planning
What to do When Your Social Security Benefits Are Reduced
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And now let’s get into it!
What is a target date fund, anyways?
A target date fund is a type of comingled investment vehicle which automatically adjusts its allocation, or mix of stocks, bonds, and other assets, to accommodate retirement at a certain pre-determined date. For example, a 2030 Target Date Fund presumes that the people investing in it will be retiring in the year 2030 or around that time.
Several large companies offer these instruments. You may have heard of these:
- T Rowe price 2030 target date fund
- Fidelity 2030 target date index fund
- Principal 2030 target date fund
One of the key assumptions that a Target Date Fund makes is that the older you get, the lower your propensity to take risk. As a result, the allocation becomes more conservative the closer we get to the year 2030. For example, the fund may have held a higher percentage of stocks, which tend to be more volatile, in the period from 2000 to 2015. As time crept on, the fund probably decreased the amount held in stock and instead increased its holdings in bonds or cash, which tend to fluctuate less.
That is typically how target date funds work: the closer you get to the end or “target date” of the fund, the more conservative the fund becomes.
What happens to the 2030 Target Date Fund when we get to 2030?
Does it blow up?
When a 2030 Target Date Fund reaches the year 2030, it will continue to function in accordance with its conservative asset allocation. At that point, the fund will be invested as appropriate for someone who is retired as of 2030. It is likely that will mean a larger allocation to the less volatile asset classes such as cash or bonds and little to no exposure to more volatile ones like stocks and commodities.
And that’s what happens to a target date fund after target date!
It’s a much bigger question…
So should that be “it” for your retirement planning – you can just invest in a 2030 Target Date Fund and call it a day, then?
If it were that simple, well, there wouldn’t be an entire industry dedicated to financial planning.
There’s a lot more to it than just shoveling a bunch of savings into a mutual fund. Retirement planning, to be effective, requires a much deeper view into your personal situation. The bigger question here that you should be asking yourself is, “What should I be doing in the five to 10 years before retirement, other than just investing my money?”
And that’s where we get into the concept of financial planning. Let’s start with the basics.
What is a financial plan?
A financial plan is basically your guide to areas of your financial life that are important, and that you may not have considered. It formalizes your goals and put them in writing in order to help you prioritize your opportunities and determine what is realistic.
A financial plan may be designed to help you accomplish a number of different objectives, for example:
- Devising the optimal Social Security strategy (when to claim, etc.)
- Putting appropriate risk management in place (life, disability, liability insurance, etc.)
- Developing a legacy plan
- Setting up and monitoring children’s custodial and 529 accounts
- Keeping taxes in retirement at reasonable levels
- Providing guardrails for big life events such as purchase of a home
Who needs a financial plan?
Anyone with life goals needs a financial plan. But there are specific tasks that a financial plan should accomplish when somebody is approaching retirement.
What is a retirement income plan?
A retirement income plan maps out what the possible sources of retirement income are (Social Security, 401k, IRAs, etc.), and assesses what all of this would translate into on an after-tax basis. It’s useful to gauge this income amount relative to the expenses that you’d be expecting to pay in retirement.
Hint: Medicare, Long Term Care, rent, daily expenses
You’ll also need to set up a withdrawal strategy so that you match the recurring, stable expenses the more stable sources of income. As we mentioned before, a 2030 Target Date Fund is probably going to hold the more stable asset classes such as cash and fixed income by the time it reaches Target Date.
Was our blog on 2030 Target Date funds helpful?
There you have it – our insights on 2030 Target Date Funds. Was it helpful?
We are financial advisors in Morristown, NJ serving the local community and beyond. If you have questions about your retirement, getting a mortgage, retiring in New Jersey, moving there, affording to live there, or (like us) are just plain old Bruce Springsteen fans, reach out and send us a message.