Investing For Retirement In A Target-Date Mutual Fund IRA

Individual age is a major factor in planning for retirement. The optimal mixture of investments for a person nearing retirement is different from that of a younger worker. Individuals planning for retirement can maintain a more suitable allocation of assets by investing in a target-date mutual fund IRA.

A younger person has many years to focus on the growth of assets, even if there are market fluctuations along the way. An older individual has less time to recover from market downturns and is usually more focused on the preservation of assets. The objective of a target-date fund is to maintain a balance between growth and security, depending on how close you are to retirement.

IRA options

Target-date mutual funds are a popular investment option in many employer-sponsored 401(k) plans. However, target-date funds may also be owned in a traditional IRA or a Roth IRA. In 2013, almost 8 percent of total Roth IRA assets were in target-date mutual funds.

Fund selection

The many investors in any particular target-date fund usually anticipate reaching retirement in the same year. The anticipated retirement year is typically included in the name of the fund. For example, an individual planning to retire in the year 2040 invests in a 2040 target-date fund. The fund adjusts its holdings over the years to maintain an investment mix appropriate for the year in which withdrawals are expected to begin.

Changing asset allocations

A target-date fund attracting younger workers typically holds a larger percentage of of its current holdings in stocks than in bonds. Corporate stocks with the potential for higher growth might include the stock of small companies or foreign companies. In the long term, the gains in stock prices may exceed the potential return on more conservative investments.

There are different mutual funds for different target years. Each fund adjusts its holdings accordingly as the anticipated retirement year approaches. Over the years, the investment mix is likely to include an increasing percentage of government bonds and short-term financial assets. Most mutual funds also maintain at least a minimal amount of cash in order to redeem shares when requested.

Your tolerance for risk may differ from that of the average investor. Your level of risk can be decreased or increased by investing in a fund with a date different from that of your anticipated retirement year. Contact an independent broker-dealer firm, such as Richard Brown Investments, for more information about the advantages of investing in a target-date mutual fund IRA.