The Lazy Way to Retire? Let’s Talk Target-Date Funds

Target-date funds just passed $4 trillion in assets. They’re now the default investment in many 401(k)s, and millions of Americans are using them without really understanding how they work. So, are they a smart choice… or just the easiest one?

 

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Transcript: 

 

Marc:

Target-date funds just passed $4 trillion in assets. They're now the default investment in many 401Ks for millions of Americans, who are using them without really understanding how they work. So this week on Plan With The Tax Man, let's talk target-date funds.

 

Hey, everybody. Welcome to the podcast with Tony Mauro and myself as we talk investing, finance and retirement. Of course, Tony is the Tax Man, and if you've got questions or concerns or need some help when it comes to today's topic, or any other, make sure you're talking with a qualified professional like Tony and his team at Tax Doctor Inc. You can find them online at yourplanningpros.com. That's yourplanningpros.com. Tony's got 30 plus years of experience as a CPA, CFP, and an EA, so a great resource for you to tap into.

 

Tony, my friend. What's going on buddy? How are you?

 

Tony Mauro:

I'm well. Enjoying the summer so far, and as we're recording, that's getting closer to the July 4th holiday, so things are good.

 

Marc:

That's true.We'll drop this one this week about two weeks early, and then we'll drop another one, probably right around there.

 

So what do you think about that? 4 trillion bucks, man, in target-date funds? That's a lot of dough.

 

Tony Mauro:

That's a lot of money. It seems that clients are starting to ask about them more. Basically, what is it? Do you think it's a good idea?

 

Which is why I wanted to talk about it a little bit just to shed some light on all this.

 

Marc:

Because the question is, Tony, is it the smart choice or is it the easy choice?

 

So they were created for that purpose, to be easy, I think. I think that's part of it because... Well, we give some back history here, just a little teeny bit. Again, according to Morningstar, hit $4 trillion in assets. In fact, it says eight out of every 10 Vanguard 401k investors hold one today. So start at the beginning a little bit. What exactly is a target-date fund? Give us just a quick breakdown.

 

Tony Mauro:

It's as the name implies, is basically they set a date, and they have all these different funds. So for example, if you're 50 years old, and they have a fund that they put a date on it, so 15 years from now they'll call it the 2040 fund, and then the '45 and on and on and on.

 

Marc:

Which we're used to seeing, right?

 

Tony Mauro:

That's what you see. And really what they're designed to do, is based on your age, they basically take a portfolio growth-oriented as you're younger, if you've got a lot of time left, and then as you age, it becomes more and more conservative, and shifts on its own to more and more conservative funds. With the theory that is that as you get closer to retirement, you want to take less risk, and you want to make sure that a down little blip in the market two to five years is not going to kill you as far as that goes.

 

So, it makes it really appealing to a lot of investors with this whole thing. Talk about set it and forget it. This fund is that exactly.

 

Marc:

It's definitely that. So they call it the glide path, so it's designed. But I think there's some misnomers in there. So part of that, but based on what you were just saying, sometimes people say... Okay, well let's just go with an easy number here, Tony. We'll just say the 2050 fund. So it's