5 Drawbacks of Target-Date Funds for Retirement
April 15, 2021 5:23 AM newsfeedback@fool.com (Adam Levy)
Posted:
Updated:
April 15, 2021 2:37 PM
Target-date funds are some of the most popular choices for retirement savers in employer-sponsored retirement plans like a 401(k). They offer a simple set-it-and-forget it option for investors. Just pick the year you plan to retire, and the fund manager will take care of the rest, automatically adjusting asset allocation and rebalancing when necessary.
But there are significant drawbacks to using target-date funds as part of your retirement savings. Here are five big ones.
Image source: Getty Images.
1. One-size-fits-all
The only metric a fund company uses to determine how it manages its target-date funds is the target date. It doesn’t account for your own individual risk tolerance. As a result, target-date funds often have too much or too little equity exposure for each individual investor. That’s evidenced by the fa
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WKBT
April 8, 2021 7:50 AM newsfeedback@fool.com (Adam Levy)
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Updated:
April 8, 2021 12:47 PM
Imagine you took out a one-year loan in January last year and decided to make payments with every paycheck you receive from your employer. You didn’t pay very close attention to the numbers, and you ended up paying more than you owed.
Sometime between February and April the next year, the lender says, “You overpaid. Here’s a refund.” And then it takes more weeks to pay you your own money back.
Whoops.
Overpaying that loan was a mistake. It may have caused increased financial stress due to lower cash flow, and that money could’ve been put to better use like buying groceries, paying down debt, or investing.
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