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More middle-class Americans are choosing to place their 401k money in target-date funds. In addition, a rising number of 401k plans use a target-date fund as its default investment.
A target-date fund allows you to choose your expected retirement year (usually in five- or 10-year increments.) It then invests in stocks, bonds and cash equivalents, re-balancing regularly depending on performance and proximity to your selected end date.
Should you keep all your savings in a target-date fund? What are the pros and cons?
Eileen is 30 years old, and is excited about her new job with a consulting company. She worries a lot about her retirement, and gets nervous when she hears talk of a coming recession. She enrolls in her company’s 401k plan, which by default puts her savings in a 2050 target-date fund. 2050 is the year she is expected to retire.
Target-date funds are often best for Eileen and others who are investing without professional help. It is likely a better choice compared to copying a co-worker’s 401k allocation, or asking her uncle what funds to pick.
Target-date funds are great options for those who are investing on their own. It provides excellent diversification, and automatically adjusts one’s portfolio. But be aware of the fees involved. They may only be suitable for those who will not panic when stocks dive.
For Eileen’s case, she may decide to still choose a target-date fund, to steer her away from making random or uninformed decisions. But she may opt to pick a 2035 fund, which is slightly more conservative than a 2050 fund.
[Editor’s Note: You can monitor your financial goals like building good credit for free on Credit.com.]
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