Target date funds have pros and cons

December 17, 2010

Learn about target date of mutual funds.

A: Target date funds are designed to provide what the fund company believes is an appropriate asset allocation based on the date at which you expect to need your money. The more time you have, the more aggressively those funds invest. As you get older, they automatically move to a more conservative allocation. Theoretically, you should be able to invest and they will do the job of rebalancing.

The potential disadvantage of these funds is the loss of some control of your allocation. The funds decide your asset allocation according to your age and the years you have left until you retire. If that date is far off, then they can take more risk, which could lead to significant losses in a down market. If your retirement date is near, then they can be more conservative, with potentially less return than you require.

CLARIFICATION

The answer to the question regarding reverse mortgages in the November 5 Money Management Q&A column should have read, "Any equity remaining after the loan is repaid goes to the estate."

Send your money management questions to medec@advanstar.com (please include your regular postal address). Answers to our readers' questions were provided by Rial Moulton, JD, CFP, CPA/PFS, cofounder of Retirement & Tax Planning Specialists, Inc. in Spokane, Washington.