What is a target-date fund?
With a target-date fund, the stocks, bonds and cash equivalents in your assets are automatically rebalanced based on a chosen date, which should be as close as possible to the date you plan to take your retirement. The closer you get to the maturity date, the more bonds and cash your fund will include and the fewer stocks it will consist of. Why? Because your investments will then have less time to recover from a loss caused by market volatility. The assets in your portfolio should therefore be more cautious.
How do I choose a due date?
In general, the maturities of target-date funds are separated by intervals of five years. To choose the fund that’s right for you, answer the question, “At what age do I plan to use this money?”
A 25-year-old man who plans to retire at 65 would choose a fund with a 40-year maturity. While his contributions might initially be 90% invested in stocks, the asset mix of his fund will evolve throughout his career. By this investor’s expected retirement date, stocks will only represent 30% or less of their portfolio.
You can include a target-date fund in your RRSP or choose to invest in it through your employer’s plan.
Different types of target-date funds
Funds focusing on the same maturity date may have significant differences. For example, how and when the asset mix will change from a majority of equities to a plurality of fixed income securities (known as the “smooth adjustment”) can vary dramatically depending on the family of funds. The asset mix of each fund can also differ significantly.
If your risk tolerance is not very high, you could choose a target-date fund with a guaranteed value at maturity (which allows you to take advantage of market upsides but provides some downside protection). Some funds also offer the possibility of locking in an asset mix (for example, 25% equities and 75% fixed income securities) that will be maintained beyond the maturity date until your retirement…
Investing all or part of your retirement savings in a target-date fund is a personal decision. However, these funds are generally designed to be your only investment vehicle. If you choose a target-date fund along with other funds, you risk skewing the asset allocation you originally intended to follow. That’s why it would be a good idea to discuss your strategy with an advisor.
Professional management
By investing in a target-date fund, you can be confident that the fund will be diversified and professionally managed. It could also give you access to specific asset classes that reduce fund volatility, such as infrastructure and real estate.
However, that doesn’t mean that you can completely “set and forget” your retirement savings until it’s time to cash out. With your advisor, you should annually compare your retirement projections to the fund’s performance to ensure that these projections are still realistic. You may find that you will have to increase your contributions or work longer to afford the lifestyle you want.
