Investment time horizons don’t always reach retirement. In many cases, we may be investing for more short-term goals like a child’s education, a down payment on a house, a big vacation, or a large purchase.
Just because it’s a shorter time horizon doesn’t mean you don’t need a strategy. That’s where target-date funds could come in handy. Most mutual fund companies offer them for a fee, but a good investment advisor can help out or you can do it yourself.
A target-date fund basically squeezes down a retirement investing strategy by automatically resetting the asset mix (stocks, bonds, cash equivalents) in its portfolio according to a time frame you select. You can often find them with targets every five years (ie: 2025, 2030, 2035).
Specific holdings may differ, but they have one thing in common: Each fund’s assets are invested primarily in stocks and bonds that move along a glide path, becoming more conservative as investors near a pre-determined point in time, or maturity.
Target-date funds are most often associated with registered education savings plans (RESP), where parents aim for the year their child will begin college or university. Contributions are invested in a tax sheltered account until they are withdrawn by the student, who is normally in the lowest tax bracket. The federal government matches annual contributions between $500 and $2,500 with a 20 per cent grant, which also gets investment in the tax-sheltered fund. The lifetime maximum grant is $7,200 per child.
A tax free savings account (TFSA) is also ideal for a target-date funds since gains are never taxed and money can be withdrawn at any time without penalty.
Target-date funds can also be included in registered retirement savings plans (RRSP) if the plan holder is nearing retirement, but don’t make a lot of sense if retirement is still a long way off.
Annual fees, or management expense ratios (MER), for target-date funds could be between two per cent and three per cent – so be sure to shop around.