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Target Date Fund 101

Video Transcript

Hey, I'm Chris with Money Burst and I believe that anyone can be a successful investor. It really does not require spending multiple hours every week looking at hundreds of different stocks. All you need is a retirement account and a Target Date Fund.

When it comes to retirement accounts, this can be anything from a 401k to a 457 plan to an IRA. All these accounts have great tax benefits that go along with them. Then the only other thing you're going to need is a Target Date Fund. A Target Date Fund is really just a collection of other investment options offered by your retirement plan. So instead of you getting that booklet from HR and agonizing over what you should pick, just go with the Target Date Fund - and it does all the work for you.

Target Date Funds are available in most retirement plans and you can identify them by their name. So, when you get that booklet from HR, typically there's a page or two that contain all of your investment options. What you want to do, is just look for the words Target Date, and they just let you know, “Hey this is the fund I'm looking for".

Some plans may have slightly different wording for how they title their fund names, but almost always you'll see a year attached to the fund name. So, you'll see something like 2065 or 2050, and this is a year that you would correspond to your expected retirement year. Just think of these as pre-made investment plans, you don't have to do anything; you just pick that one fund and then that's it.

Within that fund they're going to have a ton of different Investments that are included. So, you'll have stocks, of course, and this will expand from big to small companies across multiple industries, multiple countries. There will be bonds, both government and corporate options. The great thing about Target Date Funds is that they auto adjust as you age to become less risky. The point of this is that they want to protect more of your money as you age because you don't want to be nearing your retirement date and you have all of your money in stocks, and then there's a big stock market crash. And so, you're trying to pull money out at a time when your account has lost a lot of value.

Bonds have less growth potential, but there's more stability in their prices. They don't swing up as wildly as stocks. So, what happens is when you're younger, you know, your 20s and 30s, you may have 90, maybe 80, percent of the money invested in stocks and then the remaining 10 to 20 is in bonds. But then each year as you age, they slowly start to shift that mix, so that by the time you're reaching retirement or close to retirement, much more of your money is in bonds versus stocks to provide some of that stability, and make sure you have enough money available to you in non-risky assets when you need it the most.

So, Target Date Funds are a great set it and forget it option. It makes it so easy for you just to pick one thing, get on with the rest of your life, and know that you're going to be set up for a great retirement.