Some blind dates turn out to be the start of very happy marriages. For the most part, though, blind dates are setups for awkward scenes in movies. Reality just doesn’t measure up to the expectations.
Now, imagine setting up a blind date several years—possibly decades—in the future. A time and place is agreed upon and essentially set in stone. Even though both people agreed to do certain things and make what seemed like logical changes as they aged and the time to meet approached—mostly wanting to play it safer and safer as life went on—not everything went as planned. So, by the time the two finally got together for their blind date that was decades in the making, it was a big disappointment for everyone. Even worse, there was no way to turn back time.
This slow-motion blind date scenario basically describes a retirement investment concept called target date funds. While target date funds started out as a good idea, time has shown that their “set and forget” simplicity can also lead to “set and regret” scenarios when one’s actual retirement date arrives.
What are Target Date Funds?
Target date funds (TDFs) were designed as a one-stop solution for retirement savings, automatically adjusting the asset mix from aggressive to conservative as the target retirement date approaches.1 They do simplify investment decisions, catering to investors seeking an easy, hands-off approach. But if investing was so simple, wouldn’t everyone be a billionaire by now?
For many, the appeal of target date funds lies in their appearance of simplicity. Choose a fund with your retirement year in the name, and let the fund managers adjust your investments over time. TDFs are, for example, often found in 401(k) plans. They are an attractive option for those who prefer not to manage their investment allocations actively.
Unfortunately, target date funds operate on a one-size-fits-all approach, potentially misaligning with the unique needs, risk tolerances, and financial situations of individual investors. This lack of personalization can lead to suboptimal investment strategies, which lead to substandard financial results. Meanwhile, as bear markets and bull markets2 come and go over the years, no adjustments are being made for aligning the asset changes to the realities of the market. For example, the upside of a bull market that occurs closer to retirement could be mostly missed if the assets had already been shifted to bonds.
What Could Possibly Go Wrong?
Higher Fees: The convenience of target date funds can come at a cost, including potentially higher fees and underperformance compared to other investment options.3 These factors can significantly impact the overall returns of your retirement savings.
Changing Goals: Life’s unpredictable nature means financial goals and circumstances can evolve. A static investment in a target date fund may mean that your portfolio shifts out of alignment with your current financial landscape.
Earlier or Later Retirement: Changes in health and many other factors could dramatically change the timing of your retirement. By nature, a TDF is pointed at a specific time for retirement. Again, this would put you and your retirement planning out of sync when there are few options for recovery.
Selecting a target date fund is also akin to programming your GPS at the start of a very long road trip. While it provides a route, it doesn’t account for the need for adjustments along the way, due to unforeseen circumstances. It’s a scary image, but driving blindfolded is not far off from the concept.
Just as road conditions and destinations can change, requiring detours, so too can your investment needs. Adapting your strategy in response to life changes and market conditions is crucial. Target date funds keep financial plans on autopilot even when conditions look nothing like they did at the start of the journey.
In the journey of investing, higher-than-expected fees and underperformance are like traffic jams, slowing down your progress. Actively managing your investments can help navigate around these obstacles, optimizing your route to retirement.
The Long-Term Investing Alternative
So, if an investor likes the appeal of a hands-off approach to retirement planning but doesn’t want the downsides of a TDF, what is an alternative? A customized investment strategy, tailored to your individual goals, risk tolerance, and financial situation, offers a more precise path toward achieving your long-term financial objectives. Incorporating a variety of investment options can provide a more diversified and robust foundation for growth. It can also increase the ability to adapt to market shifts and changes in personal circumstances along the way. This requires more active portfolio management.
Engaging in active management and regular reassessment of your investment strategy ensures it remains aligned with your evolving financial goals and the changing economic landscape. Consulting with your financial advisor can be invaluable in developing a personalized, flexible investment strategy. If you already have a TDF within a 401(k), for example, your advisor can optimize fund selections to best align your overall portfolio to your goals. Their expertise can guide you through the complexities of financial planning, ensuring your approach is uniquely suited to you—and your plans for a comfortable and active retirement.
While target date funds offer a “convenient” approach to retirement planning, there’s a reason that investors’ “sounds too easy” alarm bells ring. Set it and forget it is an approach that might work for things that aren’t subject to change much over time. But economies do change, as do markets, risks, opportunities, and personal situations.
By taking an active role in managing your retirement savings and considering a diversified, tailored investment strategy, you can navigate the journey to your financial future with confidence. The guidance of a financial advisor can ensure your investment strategy is not only suited to your current needs but also adaptable to your evolving financial landscape as your date with destiny—aka retirement—approaches.
Disclosure: This information is for educational and informative purposes and shall not be considered a specific recommendation. Readers are advised to speak with their advisor at JL Bainbridge to determine their specific recommendations that meet their investment objectives and to review their portfolios. The material being provided is thought to be accurate. However, the information is compiled from multiple resources and may become outdated or otherwise rendered incorrect by new research or corrections without notice. J.L. Bainbridge & Co., Inc., is not a broker dealer and does not offer tax or legal advice. Please consult your tax or legal advisor for assistance regarding your individual situation. It should neither be assumed that future results will be as profitable or that a loss could not be incurred. For more information related to our firm, please see our disclosure brochures at jlbainbridge.com and https://adviserinfo.sec.gov/firm/summary/108058.