What You Need to Know About Target Date Retirement Funds

February 10, 2023

In this highlight, we discuss what you need to know about target date retirement funds.


We recently had a question from a listener about whether using target date retirement funds in both their 401k and Roth IRA is limiting their investment opportunities.

I often see people overthinking their portfolios and trying to outsmart themselves. Having multiple target retirement funds in one account can sometimes lead to a mess, as these funds are meant to be a basket of different funds, chosen based on when the investor needs the money. The asset allocation adjusts over time, becoming more conservative as the investor approaches retirement age.

Instead of worrying about the types of investments and accounts being used, early on in the wealth-building journey, the focus should be on increasing savings rates. The savings rate is much more important than the rate of return during the early stages of wealth-building.

Using target date retirement funds in both a 401k and Roth IRA is not limiting their investment opportunities. It is a great way to start building wealth and diversifying their portfolio, until they reach a critical mass where a more sophisticated asset allocation strategy becomes necessary.

The after-tax account is the only account where using target date retirement funds may be a negative, as it makes it harder to do tax loss harvesting and other things. But, this is typically the last basket of the three-bucket strategy and that it is easy to liquidate and diversify into a more complex strategy later on.

In conclusion, I would advise listeners to focus on their savings rate and the big things, such as increasing their income, and not to major in the minors. Keeping it simple and focusing on the important things in the wealth-building journey will lead to greater success in the long term.



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