Target-date funds are designed to be an easy, set-it-and-forget-it investment option for retirement, and they’ve gained immense popularity with over $3.5 trillion invested by the end of 2023, according to Morningstar. These funds offer a diversified mix of stocks and bonds and adjust their risk level as you approach retirement. However, many investors still make some key mistakes that can hinder their long-term financial goals.
One common mistake is owning multiple funds or adding extra stock and bond investments alongside a target-date fund. This undermines the purpose of these funds, which are designed to provide full diversification within a single fund. Our CEO, Marianela Collado, CPA/PFS, CFP®, CDS®, was recently quoted in a Barron’s article where she pointed out, “I see people use them incorrectly. I see them pick different target-date funds and then pick bond funds or stock funds.” The idea behind a target-date fund is to keep things simple and let the fund do the work, so mixing it with other funds can throw off your allocation and increase risk.
Another important consideration is fees. While target-date funds may look similar in terms of holdings, the fees can vary significantly. A higher fee may seem minor, but it can result in much lower returns over time, potentially costing you hundreds of thousands of dollars in the long run. Additionally, target-date funds aren’t always the best fit for retirees. They’re great for accumulating wealth but don’t always provide the best strategy for generating income once you’re in retirement.
To make the most of a target-date fund, it’s essential to stick with just one, choose a low-fee option, and ensure the fund’s allocation aligns with your personal goals. If you’re approaching retirement or uncertain about your retirement strategy, it might be worth revisiting your choices to ensure you’re on track to meet your financial objectives. If you have any questions or need guidance on your retirement plan, feel free to contact us.
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