In this video, we need to talk about why you definitely want to avoid investing in Target Date Retirement Funds if you’re working towards Financial Independence.
All a target date fund is is an investment vehicle that automatically puts your money into a mix of stocks and bonds based on the year you plan to retire. Think of a target date retirement fund like a fund of funds because instead of directly holding individual stocks and bonds, they’ll just go out and buy different indexes that already hold those investments. As time goes on the fund will automatically adjust your stock and bond allocation as you move closer to the specified retirement date. This is sometimes referred to as a glide path because you’re most likely going to be investing differently when you’re 40 years from retirement compared to when you’re 5 years from retirement.
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Target Date Funds have become so popular over the years because they’re an extremely easy way to invest for retirement. All you have to do is choose the year you plan to retire then the fund will handle investing your money and change the allocation between stocks / bonds as you move closer to that date. Although it’s not difficult if you take the time to educate yourself, knowing what type of allocation to use can be a little overwhelming at first. I’ll admit that a TDF is helpful in this way.
401k providers have also started using a Target Date Retirement Fund as the default investment option if one of their employees doesn’t log into their account to set everything up. I suppose this is better than just having the money sit in the account without being invested.
While there are a few things that are good about a Target Date Fund, it’s definitely a sub-par investment option…especially for someone pursuing Financial Independence.
A couple of the downsides that we’ll touch on in more detail are:
1. Target Date Funds only take into account the end goal without knowing where an investor is currently at. If someone happens to be behind with their investing goals then this type of investment could turn out to hurt more than it helps.
2. The bond allocation for a target date retirement fund is too high in the younger years and rapidly increases way too quickly as time goes on.
3. More expensive than it needs to be. You’re paying a premium for an investment that doesn’t take into account your specific needs.
4. The worst investment to put into a taxable brokerage account
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Disclaimer: This video is for entertainment purposes only. Everyone’s situation is different so do your own research before making any decisions with your money. If you need help then contact a Certified Financial Fiduciary before trying anything that is mentioned in this video. I prefer a Fiduciary financial advisor that charges an hourly fee as opposed to an ongoing fee based on a % of your portfolio. Always remember that incentives determine the type of advice they give you so one that charges an hourly fee is less likely to be problematic.
Best Selling Author Kedma Ough chats Target Funding on Nationally Syndicated Daytime TV w Cyndi Edwards.
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