The Good, The Bad & The Ugly About Target Date Funds

[@annaeverett]

Fidelity has target date INDEX funds with 0.12% expense ratios! These are “passively” managed. I don’t personally use them, but I recommend them to my friends that want a hands off approach.

[@USCMM09]

I don't like to use them because of the points you made in this video (actively managed, conservative, etc.) but my partner loves them because he wants to be 100% hands off. I convinced him to move to a target date fund that is about 10 years later than our expected retirement date in the hopes that it will be a less conservative mix of stocks and bonds as we age. I hope that is a successful approach.

[@ErinTalksMoney]

I hope so too!!

[@breehartley1627]

Plus, some of those funds might sit in that account for 30 years before you ever need to withdraw them. That is a long time to have the funds not working for you as aggressively as they could be.

[@littlejoe1778]

I have them in my 401Ks, for the simple reason, the target date funds hold reits and tips where they are not offered as choices to pick. I do have the target date 10 years past my ideal retirement and because I do think the glide path is too conservative.

[@cgranero1]

I got out of my target date fund late last year. It was the default 401k plan that everyone gets at my company. When I saw that 10% of my target date fund was in bonds (despite me still having 25 years until retirement), I switched my 401k to index funds that had lower fees and higher returns. You made a lot of good points in your video. They are good for someone with low risk tolerance, or someone who doesn’t know what to do with their 401k. But the more I learned about investing, the more clear it was to me that a target date fund was going to cost me a lot of money in the long run.

[@LiamRappaport]

I got out of my target date funds when I realized the returns were trailing the S&P. You brought up an excellent point about withdrawing them that I had never considered though, and how the stock/bond portions aren't independent of each other for the purposes of applying the 4% rule.

[@shaereub4450]

Betterment has taxable account ETFs, that are somewhat like target date funds: they recommend a stock/bond ratio based on your date, and than they change the asset allocation to less stocks more bonds overtime as you get closer to your date.

[@martypoll]

I think I approached this opposite what you suggest. In my 30’s I invested in various types of mutual funds. The common wisdom was to make mistakes when you are young because you have time to recover. After a number of years I decided that I still didn’t understand investing so I eventually switched to a target date fund. Then I suffered some losses during the 2008-2009 stock market crash. Maybe I was somewhat insulated by a conservative balance? I don’t know. My losses didn’t deter me from retiring at 55 years old in 2011.

[@wmb9419]

Target dates are okay, for me they're just one more in the list of funds that I am in. Between my wife and I, we are in about 30 different funds. I find the target dates a bit conservative but my goal is to retire at age 60, so I opted for target dates when I will actually need the money which is at least ten years beyond that. If nothing else, their fee's are generally low and it can be a set it and forget it sort of thing if you're not inclined to be involved.

[@ErinTalksMoney]

Absolutely!

[@johngill2853]

Actually the original study that came up with 4% plus inflation being the safest/Highest withdrawal rate used 50/50(stocks and bonds)

[@michaelswami]

Good discussion Erin. With all due respect fidelity and vanguard, I will decide my own asset allocation and it isn’t really too much work.

[@CB_4216]

It baffles me that the TSP was set up by default to put 100% in the G Fund for military. Some troops invested for 20 years and never knew that and found out their entire retirement account was essentially in a savings account. That sucks! At least they finally made the lifecycle funds the default when they rolled out the blended system a few years ago.

[@taz78taz40]

I left all my old funds in target date funds. Starting two years ago I switched all future contributions to the Russell 1000 index fund. Fees are way lower and with my old funds in the target date funds. I still have some exposure to international stocks.

[@TheHobbyShop1]

I do have some of my 401k in target date funds but it’s only about 20%. It seems like a bit of a dud honestly. I haven’t been impressed with the returns even though I still have a way to go towards retirement. It always seems to trail my overall portfolio performance. Great video!

[@ErinTalksMoney]

Thanks for watching! 😊

[@LaTonyas_Library]

I’m glad the TSP goes to target date funds now. But after reading about the different options I decided to change to 100% stock for future contributions. I have a large amount in I Bonds so I didn’t want to be even more conservative lol. Target date funds are great for people like my fiancé though. He just wants to set it and forget it. But I think it’s fun to figure out how to shape my finances for my personal goals.

[@ErinTalksMoney]

I'm so glad the default has changed as well!

[@TBIhope]

I have Vanguard target date retirement funds in tax-advantaged accounts. I have no plans to invest elsewhere for retirement, but I'll consider it now that I know what percentage is bonds. The good news is that I have plenty of time! I won't retire for 35-45 years!

[@ErinTalksMoney]

You have along time horizon to work with!

[@lukehanson5320]

3:35 Engagement comment. Tell me you're from the Midwest without telling me you're from the Midwest. "Byalance." Keep spreading the good word, Erin!

[@jamesodell3064]

I wonder how different Target Date funds are from what robo advisors recommend. My guess is that their recommendations are fairly close with the robo advisors charging more. Also are the fees for Target Date funds on top of the fees for the funds they hold. If they charge additional fees you would be much better off buying the individual fund and rebalancing yourself.

[@roderick.t]

Perfect timing, Erin. 🙌 We’re scheduled to chat with our Fidelity financial planner next week and target-date funds were on the discussion list since we’re currently in 100% stocks - I know, don’t judge 😉. I’ve read about target-date funds back in the day but didn’t consider them due to their management fees and potential for being too conservative. Your video clarified many of our questions, so I think we’ll just rebalance the investments to 80/20 or maybe even 70/30. Thank you for another awesome video! 😊

[@ErinTalksMoney]

Thanks Roderick! Have a great chat with your planner!!

[@whorhaydelfuego7190]

I used target date funds for a few years until I noticed just how conservative they were. I was decades from the target date and they were already putting large chunks of my investment into bonds. Now I eschew the target dates and just put it all in the index funds. I figure whether or not the market is in a crash or not when I retire, isn't very relevant because I won't be cashing out large pieces of it all at once anyways. Even if the market is very bad I should be able to last until it recovers on SSA, pension, and regular savings.

[@kirklandphil]

Great show today. Younger people should use this as a guide. But for some who do no research, it might be a good way to go. Have a good weekend, you need to find a place in a no-fly zone:)

[@ErinTalksMoney]

😂 right!?? I live about 10 min from the airport - so that’s my problem. But it’s crazy convenient for travel!

[@guanafd]

Good you mentioned fees. I am invested in mutual funds in my ninth world country and let me tell you the fees: the one that invests in home country stocks ALL 10 OF THEM has annual management fee of just 1.77%, the other fund that is international Europe and U.S.A. and has some gold mining companies the fee is 2.77% and transaction fee (front loaded) is 3.5% of total sum. So, I will use these funds as cash buffer in the future and some kind of diversification, but I will reduce them to half of what they have put in now, and invest in dividend stocks.Otherwise as Dave says, it's beans and rice,rice and beans for me.

[@USCarolinafan13]

The indexed varieties are definitely a good choice for new investors or those who don't care to learn about investing. I still prefer being all in stocks vs bonds at my younger age. Maybe as I get closer to retirement I will change my tune. Note - I wrote this before watching the video and you basically say the same thing 😅

[@ErinTalksMoney]

haha, love it!!

[@designthedays]

Fidelity has Target Date INDEX funds (called the Fidelity Freedom INDEX funds) that have a 0.12% expense ratio. Very close to the low fee index funds. However, I do agree that target date INDEX funds can be too conservative. People should look at doing a Bogleheads 3-fund portfolio for simplicity.

[@nathanyoder4509]

Hi Erin! Thanks for more great content!

[@ErinTalksMoney]

Thanks Nathan!

[@tonyflaminio2719]

Wonderful video Erin Talks Money (ETM)! I have never used Target Date Funds, not even sure if they were around when I started investing. I agree with all of your points on Target Date funds, they have their place but like all investments, you need to what the potential short comings of your investments.

[@ErinTalksMoney]

Thanks Tony!!

[@danewilson1378]

Awesome discussion on TDFs. Is there any way to know how these funds will do as the target date approaches? Looking at Vanguard’s 2055 TDF, the YTD performance is 6.52% and the 10 year return is 8.14%. But I would assume these returns will not be near the expected returns as 2055 approaches and the fund becomes more conservative and the ratio of stocks to bonds decreases. Or am I just not understanding TDFs and their performance?

[@voncilledemesa2075]

How do you suggest someone transition out of a 401k TDF?

[@albert1558]

Great smile!!

[@ErinTalksMoney]

Thanks Albert!

[@RoadRunner592]

I honesty dont mind target date funds in a traditional 401k, however, i want my roth ira as aggressive as possible to maximize possible returns. I put 12% of my paycheck into my Vanguard 2055 fund and it is 90 percent equity. My roth ira is between 96 and 98 percent equity, with 47 percent of it in FSKAX (Fidelity Total Stock fund market fund), 33 percent of it holding FSPSX (Fidelity Total International stock market fund), the rest is divided up into various stock ETFs. The other 2 to 4 percent is a tiny mixture of gold, silver, newly purchased treasury etf at a record low price. My traditional IRA is only 80 percent equity. Less return on the traditional means less owed in taxes at retirement. Roths are not taxed, hence why i am aggressive there.

[@doggydude4123]

I don't exactly like these funds either but my 401k and 457 are tied into these funds.

[@darobcar17]

I have a 401k from a previous employer, what advice or tips would you recommend? I was thinking of opening an IRA? Roth or Traditional? What do you think of dividend investing as another way for passive retirement income?

[@gautamvishwanatham7512]

Target date funds get you 85 percent of the way , and target date funds are not actively managed. My 401 k target date fund fee is 0.055%, in Roth IRA it’s 0.08%.

[@damontolhurst]

Wondering what your thoughts are on combatting the conservative downside of TDFs by selecting one that's further out than actually needed. For example, if retiring in 2050, select a 2060 fund. That will extend the glide path further out, keeping it heavier on stocks for longer, but still slowing down as you start approaching retirement. Another downside that I find frequently comes up in TDFs and other retirement-based conversations is the difference between retirement and drawing from retirement accounts. Maybe I select a 2040 fund in my traditional 401(k) because I plan to retire in 2040, but I'm actually only going to be 55 in 2040, meaning I can't draw from that account yet.

[@ErinTalksMoney]

I have a video coming up on bridge accounts to help cover that gap in early retirement 😊

[@damontolhurst]

Oh, right. I'm up on all that. I was just commenting on a distinction that often goes undistinguished. What are your thoughts on my first paragraph?

[@jeffboyd3391]

I have a target date fund through Fidelity, it is the 2020 fund. It has done terrible. When the market was doing well, it underperformed, with the market doing poorly it has lost, I think over 20%. I thought I was being prudent, I think I made a bad decision

[@rdbeaz]

Target date funds Suck ..yes even Vanguard

[@brandonrunkel6290]

Target date funds are only good with beginner investors but terrible for anyone who has some level of sophistication with investing and should NEVER be in a taxable brokerage account.

[@pprb123]

The fees are the big issue for me, 0.7 vs 0.07 will add up to thousands over 40 years

[@jdmulloy]

Around 8:00 you talk about TDFs being "actively managed" and thus having high fees. They dont have to be actively managed. They have a planned asset allocation that they achieve by buying the correct proportion of funds, which a computer program can easily do. The reason thw Fidelity Freedom funds have a high expense ratio is because the underlying funds are all actively managed. It's possible they also have a manager picking the proportions of underlying funds they think will perform well, but they sont have to. Vanguard's TDFs are only index based, so as you noted, they're reasonably priced. Confusingly Fidelity has both index and non index TDFs, both named Fidelity Freedom... The only way to tell them apart is that the index ones say index in the title. Obviously the Index versions are the ones I think you would recommend to viewers of this channel.

[@cybercab]

TDFs aren’t the worst things out there but they’re needlessly expensive. I could literally rebalance once a decade and get the same results without the high fees. But it’s better than nothing.

[@Collador19]

Am I the only one that things cheaper fees is not always better? I prefer returns net of fees, and if you have a manager/team that provides that then it's okay to pay more for it. I understand all things being equal, lower fees is better. But that's just not always the case. I'll give an example, this was from 5+ years ago so not sure it still true. Fidelity's S&P 500 fund had a fee of something like .3%, while another firm's had a fee of around 1%. The reason for this is the other firm had a manager that was allowed to take up to 20% of the fund and invest outside of the S&P 500. That particular fund had outperformed the Fidelity fund over a 1, 3, 5, and 10 year time frame net of the fee. Obviously the manager making those choices was doing a good job, which isn't always the case. But it is definitely not uncommon either.

[@homeaudiobasics]

I used to work for a company that had no self direct option, and the 2 target date funds offered were losing 17-23% during the boom. Wtf?

[@ErinTalksMoney]

Ouch! 😣

[@noveltyrobot]

Bit unfair on fidelity here. You did not show their index TDFs which have a 0.12 ER.

[@ErinTalksMoney]

Oh goodness, you are right! Certainly wan't my intention - I just automatically went with their most popular funds. That was an oversight, I'm sorry. I do love Fidelity.

[@SPY_0-DTE]

@@ErinTalksMoney you had one job 🤦🏻‍♂️. Kidding, keep up the good content

[@delliott777]

I’ve not been impressed with performance of Target Date funds.