Money Monday: What is a target date fund?

Michigan

LANSING, Mich. (WLNS) – One of the most popular ways to invest for retirement is through a target date fund, but what exactly is a target date fund and how do they work? Financial expert Stephen Schiestel has the answers.

“These are funds that combine both cash bonds, us stocks, and international stocks into a single fund. And we can identify these because they often will have a year in the new,” said Schiestel.

For example, if you set a target date fund to end at 2050, that means the fund is designed for you to retire in 2050.

“The key with a target date fund though, is this concept called the glide path. So we maybe ask them like, what is the glide path?” said Schiestel.

“The glide path is associated with target date funds. And they’re set up that as the funds are really far out into the future that they are designed. To reduce the amount of allocation into stocks and hence glide down to a smaller allocation as we can closer and closer to retirement. And so, for example, a target date fund with a retirement year of, let’s say, 20, 25, he’s going to have less stock allocation.”

In short, the best way to pick a target date is to just choose the year you wish to retire.

“We can put them inside of our IRAs and we can really even do that. I’m in a taxable fund. So they really are designed to meet a one size fits all for an investment allocation far into the future than to slowly kind of, you know, kind of grow with us as we get closer and closer to the time of needing the funds,” said Schiestel.

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