When the financial crash occurred in 2008, many investors with TDFs who were looking at retiring in two years were shocked when they discovered that their assets plummeted in value—even though they were close to their target date. Uncertain markets serve as a particular disadvantage to millennial investors, who have a longer investment horizon. With unpredictable market fluctuations, retirement plans may take a larger hit than they expected over time. TDFs are not immune to market shifts, even as the target date approaches. This means that market fluctuations will continue to affect retirement funds.
Uncertain retirement age. There is also an increasing number of millennials who don’t believe they will ever retire, but will instead undergo several mini-retirements or complete career changes altogether. Millennial investors who fall into this category could understandably not need a target date fund as there is no set date they will retire.
Planning For Retirement
Glide path. When looking at TDF options, it is important to note what their glide path will be. The glide path is the rate at which equity exposure is reduced as the fund reaches the target date. Even if the target date is the same, the glide path may differ dramatically, leading to a drastic difference in the amount of money in the TDF. When looking into TDF options, it’s important for investors to know their risk tolerance at different stages in life, and to find a glide path that will match that.
Active participation. A target-date fund does not automatically guarantee a comfortable retirement, which means that investors should be aware of the performance of the fund as the date nears. Closer to the target date, it may be worth diversifying portfolios further to help safeguard against potential losses from market shifts. Although this idea may seem far off for millennials, it is important for them to take an active role in planning and not rely exclusively on the set-it-and-forget-it mentality.
When considering target date funds, understand the risks beyond the benefits. There are also other funds available that can be more effective and will match an individual’s risk tolerance more closely. Look at all of your options, as it is important to have a diversified portfolio to create a successful retirement strategy, especially for millennial investors.
Christopher Crawford is the director of advisor relationships for the Buffalo Funds in Mission, Kansas. With over 10 years of experience working with financial advisors supporting their business development efforts, Christopher notes that success for advisors begins with being a good communicator and a better listener.