Target-Date Funds can help you prepare for retirement.
You know you need a significant nest egg for retirement.
In fact, you have started saving.
You are even using target-date funds.
They seem simple enough.
You pick the earliest date you estimate for retirement and let the fund do the work.
You are set.
According to a recent Barron’s article titled “Retirement Savers Are Misusing Target-Date Funds. 3 Mistakes to Avoid,” this is not necessarily true.
Many people misunderstand target-date funds.
Seemingly small misunderstandings can lead to rather significant issues.
What are the most common target-date fund mistakes?
Using multiple target-date funds.
Most people only need one retirement date.
Choosing more than one will complicate matters and prove more trouble than it is worth.
The exception would be if there is a significant age discrepancy between spouses and the 401(k) is expected to cover the bulk of retirement income for both parties.
Not taking a “set it and forget it” approach.
You do not need to diversify your portfolio.
The target-date fund is designed for long-range investing.
Unfortunately more than 50 percent of investors pull these funds and reallocate after 10 years.
The common reasoning is a desire to diversify.
In reality, the target-date funds are already diversified.
Going from a target-date fund to extreme changes in asset allocation.
The majority of people who cancel their target-date funds move almost all of their funds to equities.
Most people who make these moves tend to do so closest to retirement age.
They are trying to get higher returns as they move closer to retirement.
While higher returns can be helpful, greater risk often involves greater loss.
Can you really afford to take a significant financial hit the closer you get to retirement?
Working with an experienced financial advisor can help you understand how to make target-date funds serve you well.
Reference: Barron’s (October 22, 2019) “Retirement Savers Are Misusing Target-Date Funds. 3 Mistakes to Avoid.”