Target-date mutual funds are one of the most popular default investment options for retirement savers’ 401(k)s. They offer an appropriate mix of stocks and bonds for one’s portfolio, based on your anticipated retirement age. These funds can be a great investment option, but to get the most out of them, you will need to avoid some common mistakes.
Here are a few common mistakes — and how you can avoid them:
Deferral Rates – While target-date funds will help you pick the right mix of stocks and bonds, they can’t force you to defer enough for retirement. We still recommend targeting at least a 10% deferral rate and starting as early as possible. With the power of compounding, a small difference in the rate of contributions can mean a big difference in lifestyle when the target year arrives.
Stay Disciplined – It is important not to ‘jump around’ with the investment strategy for your portfolio. Target-date funds are focused on managing the portfolio for the entire time before you retire, so it is important to stay disciplined to that strategy.
Choose Just One – Research findings suggested that investors are diluting the target-date strategy by holding multiple of the funds[1]. One in ten people who use target-date funds own more than one vintage, according to the study[1]. In rare cases, it might make sense to own a 2050 and 2060 fund, for example, if you are staggering your retirement. For most people though, one fund should accomplish the asset allocation mix that you are looking for.
Overall, target-date funds can be a great choice for your portfolio, just be mindful of the aforementioned mistakes!
[1] “Target Date Funds: Who is using them?”, Alight Solutions, 2017