Saving for retirement is an important way to prepare for your financial future. And target date funds, also known as TDFs, can be an effective way to balance risk as you approach this next chapter.
Hitting the Mark with Target Date Funds
For investors who are not inclined to reassess and tweak their portfolios every year, target date funds may be an effective way to invest for retirement.
What Is a TDF?
TDFs are investment funds that take into account the year in which you plan to retire (the “target date”) and automatically reduce your exposure to riskier investments as you near that date, helping to limit the chance that a market shock wipes out a substantial portion of your portfolio as you're getting ready to cash out.
How Does It Work?
TDFs adjust equity and fixed income exposure continually during the life of the investment, using the investor's distance from retirement as a guidepost. A portfolio targeted for a younger investor—shooting to retire in, say, 2060—might allocate between 96% to 76% of holdings in equities, while those nearing retirement might hold 40%.
Instead of making the adjustments every year manually, and perhaps making some prudent (or imprudent) tweaks, a TDF will change the mix gradually and automatically, seeking to optimize holdings throughout the life of the investment.
What To Consider
When comparing TDFs, there are several factors to consider. Portfolios are made up of underlying funds, and those funds can be either actively managed or passive funds, such as ETFs, or a combination of both.
TDFs can also be either open or closed architecture. Meaning, some managers stock their TDFs with only their own proprietary products (closed), while others have no such restrictions (open).
The Bottom Line
There are a number of investment options to consider when you’re working toward retirement. TDFs are one possibility—and can be useful for those who are interested in more of a set-it-and-forget-it approach to saving for retirement.
This article has been prepared for informational purposes only. The information and data in the article has been obtained from sources outside of Morgan Stanley. Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of the information or data from sources outside of Morgan Stanley. It does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this article may not be appropriate for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. An investment in a target date portfolio is subject to the risks attendant to the underlying funds in which it invests. A target date portfolio is geared to investors who will retire and/or require income at an approximate year. The portfolio is managed to meet the investor’s goals by the pre-established year or "target date." A target date portfolio will transition its invested assets from a more aggressive portfolio to a more conservative portfolio as the target date draws closer. An investment in the target date portfolio is not guaranteed at any time, including, before or after the target date is reached.
Investors should carefully consider the investment objectives, risks, charges and expenses of a mutual fund or exchange traded fund (ETF) before investing. The prospectus contains this and other information about the mutual fund and ETF. To obtain a prospectus, contact your Financial Advisor or visit the mutual fund or ETF company’s website. Please read the prospectus carefully before investing.
Diversification and asset allocation do not assure a profit or protect against a loss.
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