The Short and Sweet Guide to Target Retirement Funds

Target Retirement FundsGone are the days of working for one company and collecting a pension after 30 to 40 years of loyal service and hard work. 401(k) plans started to emerge around 30 years ago (1978 Congressional Provision), and the idea was that as long as employees continued to contribute to them that the rule of compounding interest would take care of their financial retirement interests. But as we now know, it wasn’t this simple. One big change this transition did was suddenly make retirement planning a lot more difficult by placing it solely in the individual’s hands and no longer in the company.

Now we have to pick stocks, mutual funds, index funds, retirement funds and also choose a percentage of our income to be set aside for it. The 401(k) plan is supposed to be better than pension plans. And they can be reliable, about as reliable as the stock market’s bull run. By this I mean that the stock market is volatile. If you put all your hard-earned savings into one stock and that stock tanks you’ll be speed dialing your broker trying to sell, sell, sell. This is similar to what happened to the employees of Enron and WorldCom when they invested the majority of their savings in company stock. Instead, put all your savings into two stocks so you have a 50/50 chance of retiring financially comfortable. JUST KIDDING! Simple math will tell you that this is still a horrible idea. Is there a solution then for those of us that don’t day trade and follow the stock market religiously? Some of us don’t even know what a bull or bear market means.

There are answers and one option is called Target Retirement Funds.

A Target Fund focuses in on a year of your choosing and invests your savings based on that. For example, you want to retire in 2040 than you pick the 2040 Fund. Want to shoot for retiring in 10 years or less than pick 2020. These funds are made up of mutual funds and index funds; both of which are safer options than stocks and usually come with low maintenance costs. Almost all companies that offer a 401(k) plan use a brokerage that has Target Funds. Talk with your HR department for specific details. If this isn’t an option for you there are brokerage firms like Vanguard or that offer Target Funds for you to pick from.

Before you get too excited there is one last thing to go over. You may be thinking that if you put $1000 in a 2020 fund that in 8 years you’ll have $1 million. Sorry, but that’s not the case. You do have to be realistic and understand how compounding interest works. Use an online finance calculator to help you figure out how much to save monthly or biweekly to reach your retirement goal. A Target Fund with fewer years will generally be invested into less risky choices – Less time, less risk. One with more years can be invested in riskier stock if you so choose. With more time you can take bigger risks to get bigger gains, but it can go the other way and become bigger losses. When you go through picking a Target Fund there will be a series of questions that will help you choose risky or less risky picks. There are a lot of places you can buy shares online, such as E*Trade, TD Ameritrade, ScottTrade, Options House and more.

Still not convinced Target Retirement Funds are for you? Here are three reasons that will help you reconsider.

  1. You just watched the financial collapse from the 1st row. You’ve seen or heard of your parents, friend’s parents, colleagues, and strangers having to work beyond their retirement goal because they lost a huge chunk of their savings. Before the collapse everything looked calm, steady, reliable, and financially perfect. But that all changed in a couple short years. You’ve probably heard that those who sold during that time have only recouped 30-50% back, whereas those who did hold have gotten 50-75% back. Do you understand this investment reasoning? You now know you need to be more knowledgeable in financial retirement planning but also feel overwhelmed with so much info out there.
  2. Wall Street can’t be mastered in a day. We all have busy lives and although we’ll be able to familiarize ourselves with investing we’ll never be able to learn it all. It would be overwhelming! We’ll still need to rely on brokerages to handle our Target Retirement Funds for us and advise us when needed.
  3. The rules of compounding interest are to invest early and invest now. (Read my article on compounding interest to master it)
  4. We now have Roth 401K plans. Be sure to ask your employer if they offer this.

What do you think? You going to check out Target Funds and see if there is one that matches your investing style and retirement goals? In 2012 there are so many options that I’d be surprised if you couldn’t find one and customize it to meet your needs. You could even consider looking into where you can stop spending and save some hard earned cash. Remember, your retirement fund is in your hands. Build now and build early!

Here’s a little Fun fact: The 401(k) got its name from a section of the 401(k) Internal Revenue Code (Title 26 of the United States Code)

Editor’s Note: John is not a registered financial advisor and writes from his personal experience through reading, studying and managing his own finances and retirement funds. All of our financial situations are different and this is just a basic introduction for your own personal knowledge.


  1. I think Target Date funds can be good, as long as they fit with your needs. The key is to look exactly at what they’re holding to make sure they’re investing in what you want.

    • Good point John! I use target index funds and am able to see exactly what they’re holding. I also look at their performance and return. Once of mine right now is near 15% the last 2 years.

  2. Good point, and the ideal *should* be that people do all their due diligence, but I think that for most people just the fact that they’re putting some money away is worlds ahead of what they’d do if target funds didn’t exist

  3. Target funds are the one thing available in my wife’s 401(k), that we aren’t invested in. instead CNN it is supply between the other 8 choices.
    I think I Ruud probably take Niue risk with a target fund because it was being managed by somebody who, presumably, knows what they are doing. I don’t and I dint like loading money so my item investing trends to be a lot more conservative than is usual fir someone my age.

    • Something tells me you wrote this comment with maybe a smartphone that has ‘autocorrect’. 🙂 The first step is saving and after that is letting a pro handle it if one doesn’t want to study on their own. But not just any pro. Look at their or the company’s history. There has to be positive returns.

  4. John,

    I have mutual funds, which I like because it spreads the risk, but I I didn’t know about Target Funds.

    Thanks for sharing this information. I’m giong to look into Target Funds a little more.

    • They might be something new. I first heard about 2 or 3 years ago. My employer switched to a new brokerage to handle our 401k and it came with an online wizard to walk us through it.

      Welcome back! btw. Good to see you again! 🙂

  5. I like it when you said “The rules of compounding interest are to invest early and invest now.” Indeed time is our ally if you we want to build your wealth portfolio.

  6. All these investments options are good. But at the end of the day what really matters is knowing what type of investment works best for your situation.

    • This is actually just one specialized investment option for retirement. If your situation is planning for retirement then this is an option to definitely look at.

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