Target date

What are target date funds?

Get a simple explanation of how target date funds work.

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Transcript: What are target date funds?

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What are target date funds?

Part of Manulife's investment basics video series.

The Manufacturers Life Insurance Company

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Two men are standing next to each other on a white-screen background. JIM is an everyday guy wearing jeans and a casual button-down shirt. CHIP is a Financial professional with a neat haircut wearing a business suit.

CHIP: Hello, all. Last time we spoke, we were discussing asset allocation funds.

JIM: These funds are managed for you by professional money managers who mix a number of different mutual funds, or asset classes, together to give you diversification within a single investment.

CHIP: Hey, you’re coming along nicely.

JIM: Uh, oh. I’m starting to turn into him aren’t I.

CHIP: But that’s not all of course. There are a few types of asset allocation funds. The most popular are referred to as target date funds.

JIM: I like these. Back to our food analogy, a target date fund reminds me of a slow-cooker meal prepared by a chef.

CHIP: Food again?

JIM: Yeah, I’m hungry. Well, just think about it. First, you decide what you want to eat – your strategy. And then the chef – the fund manager - puts all the ingredients - asset classes and mutual funds - together for you. And then they manage it for you until you’re ready to eat – or ready to retire.

CHIP: Not bad. But can you explain how target date funds really work?

JIM: Of course. First, you take your birthdate… mine is February 14, 1990.

CHIP: Awww, you were born on Valentine’s day. That’s so cute.

JIM: OK, then you just add your birth year to your planned retirement age.

CHIP: Once you’ve done this, you select the target date fund that is closest to your retirement year from a list like this...

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Target Date Fund 2035

Target Date Fund 2040

Target Date Fund 2045

Target Date Fund 2050

Target Date Fund 2055

Target Date Fund 2060

JIM: So, I would select the “2055 Target Date fund” because that’s the year I’d like to retire stop making contributions to my retirement plan.

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Target Date Fund 2035

Target Date Fund 2040

Target Date Fund 2045

Target Date Fund 2050

Target Date Fund 2055

Target Date Fund 2060

CHIP: Does that mean you’re an Aquarius? Ooh, I love it. Explains so much.

JIM: Just drop it, man…. So, since I’ve selected the 2055 Target Date Fund, the fund manager, will know how long I have left until retirement. And that’s how they will decide how to invest my money.

CHIP: If you’re young, you may be willing to take more risks since you have a longer time to recover. But if you’re nearing retirement, you probably want to protect what you have and not take as many risks.

JIM: Right, so the mix of asset classes and investments in each target date fund will change over time. Target date funds will take more risks in the early years and get more conservative as it gets closer to your planned retirement date.

CHIP: So, there would be more equity exposure in the earlier years…

JIM: Now, what he means is that target date funds invest more heavily in stocks and riskier investments early on and move towards more bonds and cash investments as you get closer to retirement age.

CHIP: Mmm hmm…

JIM: The hope being that when you reach retirement age, your “target date”, you will have a nest egg that will be fairly conservatively invested.

CHIP: Right, but investors should examine the fund to ensure it’s consistent with their own risk tolerance. The money you invest and your potential rate of return are not guaranteed at any time, including at or after the target retirement date.

JIM: Always with the risks. But, I get it the stock market can be risky, so you have to keep an eye on your investments.

CHIP: Yeah, it’s important because people nearing retirement generally can’t afford to take risks, and potentially lose a big percentage of their hard-earned money.

CHIP: (Cont’d) And who still says “nest egg”? I’m telling you, man, for a millennial who enjoys clarity, your expressions are just terrible.

JIM: I didn’t say that.

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