The Best Way to Set Up a Retirement Account
Planning for retirement can be a bit overwhelming. You have to decide what type of account you want to invest in such as a Roth IRA, IRA, or a 401k, you have to choose a fund to invest your money in, the share class you want; either class A or Class B shares, you have to determine how money you need to invest to hit your goals, and if that isn’t enough you need to continually monitor your retirement to make sure it’s all going the way you want it to. This can all be a bit confusing, however what if their was a better way? In this article I’m going to cover an option that may make this process a lot more simpler, target date retirement funds.
What Are Target Date Retirement Funds
Target date retirement funds are not like your normal investment. With a typical fund you are investing your money based on either the amount of risk or a specific type of security. For example, a fund I invest in with my works retirement plan is a moderate growth fund, which is a fairly risky fund. On the other hand another fund I could invest in is a tax free municipal bond fund. With this fund you would only invest in this particular type of security and nothing else.
With target date retirement funds they would invest your money based on when you plan to retire, and as you get closer to your retirement date the fund will continue to get more conservative . For example, the Vanguard 2040 Target Date Fund means that you are planning to retire in the year 2040 and as you approach this date your account will cut down the amount of risk it is placing on your money.
Benefits of Target Date Retirement Funds
The great benefit to having this kind of fund is that you won’t have to worry about switching funds to lower your risk as you get older. On top of that once you do hit your target retirement date you don’t have to take the money out of the fund either. This is because once the fund hits the target date is go into a more preservative mode were it’s goal will be to keep your money safe without losing any value during your retirement years.
Final Thoughts on Target Date Retirement Funds
As a final thought not all target date retirement funds are created equal. Before you invest in any one fund make sure you consider the funds fees and past performance. Some funds will charge very high sales charge fees, and annual expense fees. If a fund is charging high fees and shows very low or even negative returns it may not be a good place for you to invest your money. To get your questions answered properly contact a investment professional as they will be able to help you weigh the risk and help you pick the proper target date fund for you.
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