If you're saving for retirement through a target date fund, your goal is probably a straightforward one: retirement income that will last as long as you need it, maybe with some left over.
Yet there's often a disconnect between the way target date portfolios are built and the retirement goal that you're building toward. Traditional target date models, such as those that follow a prescribed asset allocation or aim to simply beat a benchmark, may in fact contain hidden risks or overlook strategies that can help get you where you need to go.
A goals-based target date fund takes a different approach. As the name suggests, this approach is designed to pursue specific outcomes, whether it's minimizing volatility or generating consistent income in retirement. In practice, it means investing in a way that seeks to increase your chances of reaching your goal – by managing risk and potentially broadening the scope of your investments.
For investors looking to grow and protect their retirement spending, a goals-based target date portfolio doesn't simply "target" higher income. Instead, it aims to minimize the risks that could lower your likelihood of generating the income you need.
Key Risks to Retirement Income
- Outliving your money. As of 2014, a 65-year-old man can expect to live to 84 or longer, and a woman to 86, according to the Social Security Administration. With a decades-long retirement to look forward to, you likely need to grow your nest egg, prudently, preferably in your younger years.
- Inflation. Even a modest increase in prices can do serious damage over several decades. You may want to consider an approach that seeks to protect your spending power with investments specifically meant to combat inflation.
- Market turbulence. During the 2008 financial crisis, U.S. stocks lost half their value, a catastrophic event for those nearing retirement. Consider a target date fund that incorporates deliberate strategies to help avoid negative surprises that can wreak havoc on future retirement income.
Ultimately, this type of "purpose-driven" target date strategy should help you achieve a different, and potentially more risk-managed, outcome vs. more traditional approaches.