What are Target Date Funds?

The US Open at Oakmont this weekend brought the world’s best golfers to their knees. JJ Spaun won with a -1. Second place (Rob MacIntyre) scored a +1. The five inch rough, glass like greens, and standing water (sorry Sam Burns) made for an extremely exciting Sunday with several lead changes.

Target Date Funds (TDFs) are passive funds that follow a predetermined path of stock to bond allocation. The fund decreases stock holdings and increases bonds as it approaches the target date. Here is a handy little Schwab graphic:

This isn’t nearly as good as Mike’s graph when we first talked about them:

TDFs are a great option for anyone wanting the easiest possible way to have a diversified portfolio with a low risk tolerance and long term horizon. Here is the Schwab Target 2065 portfolio holdings:

You have domestic large and small cap, international (including emerging markets), REITs, and a tiny sliver of bonds and cash. The expense ratio is higher than a passive ETF at 0.14%, but you are getting a much more diversified portfolio PLUS automatic rebalancing as the target date approaches. 

These products follow the principle of increasing your bond holdings as you approach retirement. While more bonds will lower your growth, it will also lower your risk allowing you to plan for retirement income. 

With 40 years from the target date, the fund only has 3% holdings in bonds/cash to maximize growth.

Here is the portfolio of the Target 2025 fund:

With over 50% bonds, the value will not fluctuate much, allowing you to steadily withdraw cash for retirement.

In my Roth IRA, I follow a very similar allocation of assets. The only reason I don’t invest in a TDF is because I have a higher risk tolerance. I don’t plan to invest in bonds until much closer to retirement (against popular advice).

Over the last couple months, I have gotten a little bogged down in politics, niche ETFs, and companies. I wanted to get back to the basics of the Dollar Debrief with possibly the simplest way to invest in your retirement. 

TDFs are not perfect. They have a higher expense ratio, touch bonds 40 years out, and follow a predetermined schedule. On the other hand, they provide a true one stop shop for retirement investing more than any other product. 

Debrief on Deck

Speaking of niche ETFs, next week I yet again stray from the basics by trying to answer the question: what is the VIX? Right now, I genuinely don’t understand it. I can’t promise that I will in a week. We will try our best.

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on Instagram.

Until then, stay the course.

Disclaimer