A Target Retirement Fund is based on a simple principle – your portfolio should have more equity early on in your career, and more debt as you near – retirement. Based on this principle a – Target Retirement Fund changes its allocation of funds every year.
Target Retirement Fund is a Fund of Funds
A Target Retirement Fund is a fund of funds, which means – it only invests in other funds. You can choose which year you will retire, and select a Target Retirement Fund – that is close to your target retirement age. For example, if I wish to retire in the year 2045, I can choose the Vanguard Target Retirement 2045 Fund.
The Funds leans towards Equity Initially, and Debt – later on
A Target Retirement Fund will be heavily invested in Equity in the initial years of investment. For example – A fund that targets – 2045 retirement, can have as much as 90% of its funds invested in equity today.
However, that mix changes gradually as you near retirement. For example -Â a fund may keep a 90:10 – Equity:Debt ratio, for about ten years, then reduce that ratio gradually every year. However, this ratio may never be totally flipped to 10:90, with a fund holding 90% debt and only 10% Equity.
There is no fixed rule though, and while some -Â Target Retirement Funds -Â may hold greater than 50% equity in them; even when you are a couple of years away from retirement, others may just hold 20% equity.
Target Retirement Funds Invest only in their own Family of Funds
A point that worth noting is that – a Vanguard Retirement Fund will only invest in other Vanguard Funds, and a Fidelity Fund will only invest in other Fidelity Funds.
Another interesting point that – The Oblivious Investor – makes is that – the Target Retirement Funds should not charge you – its own expenses, over and above the expenses of the funds it holds.
List of Target Retirement Funds
The major Target Retirement Funds are offered by
- Vanguard Target Retirement Funds
- Fidelity Target Retirement Funds
- T – Rowe Price Target Retirement Funds
Has this concept been oversimplified?
I think that the Target Retirement Fund is an oversimplified product, and doesn’t offer much to an investor. All the fund does is: keep investing a steady percentage amountÂ from equitiesÂ to debt over a number of years.
If you have a decent idea of your expected annual savings, and your retirement goals – you are in a much better position to invest this money on Equity and Debt funds yourself.
Even if you are not an active investor, there are plenty of Index Funds that can help you invest in equities and money market funds. I don’t see the benefit of restricting yourselfÂ to one fund.
So bottomline is:Â you need to do a decent bit of analysis of where the Target Retirement Fund invests in order to make an informed decision. This again will be a tedious task for most investors, and this time can be better spent in analysing, and investing in other funds directly.