Target Date Funds May Be Riskier Than You Think | ETF Trends

By Dr. Sonu Varghese via

Target date funds may be riskier than you think.

This is especially true as you get closer to retirement. But even if you are decades away from retirement, these funds may be taking on more risk than you are comfortable with.

There is a lot of misconception about target date funds. In a survey by the Securities and Exchange Commission, about 40% of respondents thought these funds were a safe investment for retirement. More alarmingly, 52% of target-date fund investors in the survey thought that target date funds guarantee retirement income.

They do nothing of the sort. The reality is that they simply offer a convenient way to invest in a diversified mix of stocks and bonds. And these investments can rise or fall, like any other investment in stocks and/or bonds.

What is the target date fund?

First a quick recap. A target date fund is basically a one-stop fund that individuals can invest in, and is most common in employer retirement plans like 401(k)s.

The key variable is your age, or rather, the year in which you want to retire — that’s your target date. Say you’re 40 years old now and anticipate retiring in about 25 years, i.e. in 2045. The target date fund you select for your plan would simply be the one with 2045 in its name. Or if you don’t make the selection, your employer may default you into the ‘appropriate’ target date fund.

That’s just about as much work you have to do with these things.

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