If you’re over 50 and have been diligently investing for retirement, you probably remember a time before target-date funds existed. Before 2007, investors had to make more complicated investment choices for their retirement accounts, but late that year the U.S. Department of Labor approved target-date funds as qualified investments for retirement savings plans. By 2025, the amount invested in these funds exceeded $4 trillion. Many retirement plans now make target-date funds the default option, simplifying the investment decision for participants.
For the average American, a target-date fund is the best “set-it-and-forget-it” investment strategy available. These funds automatically rebalance as you approach retirement, ensuring an age-appropriate asset allocation over time. However, as you get older, it’s important to pause and assess whether your target-date fund still aligns with your changing financial situation and retirement goals. While it may still be appropriate for your age, it might not be the best choice for your specific circumstances.
Understanding Target Date Funds
Target date funds are mutual funds or exchange-traded funds comprised of a mix of stocks, bonds, and cash. The mix shifts from higher-risk to lower-risk investments as participants approach their “target” retirement date. They start with a higher equity percentage when you’re younger and gradually shift toward more conservative investments like bonds and cash as your target date approaches. While this simplicity is appealing, your personal circumstances may have changed in ways that make the fund’s one-size-fits-all approach less suitable.
Why Age 50 Is a Critical Evaluation Point
At 50, you likely have a substantial amount already saved for retirement, are in your peak earning years, may see yourself working at the same company for the remainder of your career, and therefore see this as the final stretch before retirement. This is an ideal time to reassess your investment strategy to ensure you are on track. You may have some idea of when you want to retire, what your retirement lifestyle will look like, and what income sources you’ll have available. Additionally, you’re at a stage where major investment mistakes become harder to recover from, making it essential to ensure your portfolio truly matches your needs.
Your Actual Retirement Timeline
The most fundamental question is whether the target date in your fund matches your real retirement plans. If your fund is labeled “2030” but you now plan to work until 2035 or beyond, the fund may be too conservative for your timeframe, potentially limiting your growth opportunities. Conversely, if health issues or other factors mean you’ll retire earlier than expected, your fund might be taking on more risk than appropriate.
Changes in Financial Goals
Your financial picture at 50 may look dramatically different than it did when you first selected your target date fund. Perhaps you’ve inherited money, paid off your mortgage, or experienced a divorce. Maybe your children are going to college, and ready to launch, or maybe still have young kids, or you’re now supporting aging parents. Each of these situations affects how much risk you can afford to take and how much income you’ll need in retirement.
Risk Tolerance and Sleep-at-Night Factor
Your emotional relationship with investment risk often shifts as retirement approaches. Some investors become more risk-averse as they near retirement, while others feel comfortable maintaining a more aggressive approach knowing they have additional income sources like pensions or rental properties. Your target date fund’s allocation may not reflect your current comfort level with market volatility.
Healthcare and Longevity Planning
With life expectancies extending and healthcare costs rising, your portfolio may need to support you for 30 years or more in retirement. A fund that becomes too conservative too quickly might not provide sufficient growth to combat inflation over such a long period.
Questions to Ask Yourself
To determine if your target date fund still serves you well, consider these critical questions:
- Does the target date match my actual planned retirement date? If not, should I switch to a different target date fund?
- What other income sources will I have in retirement? Social Security, pensions, rental income, or part-time work can reduce your dependence on portfolio withdrawals.
- How much market volatility can I handle emotionally and financially? Be honest about how you’d react to a significant market downturn.
- What are my expected withdrawal rates? Conduct a cash flow analysis to determine how much your are currently bring in and how much you are spending to determine your need for withdrawals in retirement.
- Do I have adequate emergency reserves outside my retirement accounts? How much you have in cash, CDs, money market funds, or other investments can affect how much risk you can take in your portfolio.
Time to Meet with a Financial Advisor
If you have more than $500,000 invested in target-date funds, it is time to meet with a financial advisor who can help you understand the following:
- What is my target date fund’s asset allocation?
- How does that allocation compare to what you would recommend in a customized portfolio for someone with my specific circumstances?
- What are the fees associated with my current fund, and are there more cost-effective options?
- Should I consider a more personalized investment strategy instead?
Taking Action
While the target-date fund provides a great default enrollment option, it isn’t a perfect investment strategy. The most effective approach is the one that aligns with your specific situation, aspirations, and risk tolerance. By tailoring your investment choices to your unique profile, you can work towards achieving your financial objectives with greater confidence. If you don’t currently have a financial advisor to help you evaluate your these decisions, consider reaching out to the fiduciary team at Hurlow Wealth Management Group. For over two decades, the advisors at Hurlow Wealth Management Group have helped Midwest Millionaires find clarity, make decisions with confidence, and feel comfort in retirement. Call 866-333-4726 or click here to schedule an introductory call today.
