Unless you have had your head in the sand the last couple of years, you have probably heard about “Target-Date” portfolios. Target-date portfolios are essentially a basket of mutual funds with the allocation decided by number of years until the money is needed. Naturally, the further out the target-date, the more aggressive the portfolio. As you approach your goal, the portfolio automatically changes the allocation for you by transfering money from the stock portion into the fixed income portion of the portfolio.
What you gain in “freedom” you lose in “personality” as the one-size-fits-all approach to asset allocation doesn’t take in account personal risk tolerance. In other words, I may have a really high risk-tolerance and therefore may not want bonds in my portfolio. But, if I’m in the Vanguard 2040 Target Retirement Fund, nearly 10% of my funds will be invested in bonds:
If I go with the Fidelity Freedom Freedom Fund 2040, I’ll have 15% of my portfolio allocated to fixed income:
And, if I go with the T. Rowe Price 2040 Retirement Fund, I’ll have 7.75% of my portfolio in fixed income:
The fees for the three portfolios mentioned above are reasonable. Vanguard’s is by far the lowest at just .21%, while Fidelity and T. Rowe Price each charge .76% (this includes the mutual fund fees). Be sure and read the prospectuses as the fees may be different depending on the target date.
So, if you want to save for retirement but don’t want to mess with your asset allocation each year and don’t mind having an allocation picked for you, a target-date fund might be right for you. Personally, I’m going to stick to doing it myself.