Investing Spotlight: Target-Date Funds and Their Role in a Portfolio

It's important to match your investments with your time frame. For example, if you have decades to go before retirement, you typically can afford to invest more aggressively because the potential for higher returns over the long run will help you weather the stock market's ups and downs in the short term. But as you get closer to retirement and you no longer have time to wait out a market downturn, it's important to gradually shift your portfolio to more conservative investments.

Fortunately, you don't need to make these decisions on your own. Most retirement plans make available target-date funds among their investing options. With these funds, investing professionals create diversified portfolios based on different expected retirement dates.

The Vantagepoint Milestone Funds (Milestone Funds),1 for example, invest in a diversified portfolio of eight to 10 underlying funds covering different asset classes, investing styles, and geographic areas. In addition, these funds undergo an aging process, where the portfolios are regularly "aged" to become more conservative over time. This aging process occurs about every six months for the Milestones Funds until 10 years after the year in the fund name. Investment professionals also monitor the underlying funds' performance every day, and rebalance the investments when needed, so the portfolios don't stray from the target allocation for each time frame.

Target Date Funds and Their Roles in a Portfolio

As an example, someone who is 30 years old now, who plans to retire and start taking withdrawals in their early 60s, for example, could invest in the Milestone 2050 Fund and would be invested primarily in equities at about 87 percent. But someone who is about to retire and start taking withdrawals in the next year or two could invest in a Milestone 2020 Fund and would be invested in a more balanced portfolio with about 45 percent equities and 55 percent fixed income, stable value, and multi-strategy. 

When the retirement date is far away, the Fund invests mostly in equities to earn a higher long-term return. But as the retirement date gets closer, the target-date funds gradually shift to more conservative investments (such as fixed income and stable value funds, which carry less return potential and lower risk than equities do). Being invested in some equities is important even in retirement because you may live for 20 or more years in retirement and will need some exposure to potentially higher-returning assets.

1The Fund is not a complete solution for all of your retirement savings needs. An investment in the Fund includes the risk of loss, including near, at, or after the target date of the Fund. There also is no guarantee that the Fund will provide adequate income at and through an investor's retirement.

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