Investment returns are critical for beefing up your retirement income. But monitoring and managing your own investments can be a headache.
Here are some of the activities you’ll need to juggle if you invest your retirement savings on your own:
- Allocating your savings to different investment asset classes. What proportion of your savings will you invest in equities, which are generally riskier but can bring higher returns, and what proportion in fixed income, which is generally less risky but can come with lower returns?
- Readjusting your asset allocation according to your own investment “risk profile,” which will likely change over the course of your lifetime and over different market conditions. For example, many investors move to a more conservative approach as their expected retirement date
An easier way: Introducing target date funds
Target date funds are investment funds designed to grow your potential income and investment growth in time for retirement.
Target date funds allocate your money into a mix of equities and fixed income that changes over time. To manage risk, more of your money in a target date fund is invested in equities in the early years of your career to grow your money as much as possible during your working years. As you approach retirement, the balance shifts to less risky fixed income. When you’re younger, you can usually take more investment risk. That’s because you’re less affected by the ups and downs of financial markets, both because you have longer to recover from any losses, and because the amount of money you’ve invested is usually smaller.
The purpose of target date funds is to help you invest for the long-term. It’s not a short-term approach.
A 30-year-old law associate planning to retire at age 67 might invest in a target date 2055 fund. As the social worker moves closer to the target date of 2055, the fund will automatically be rebalanced so it becomes more conservative, with fewer equities, which are generally riskier but bring higher expected returns, and more fixed income, which is generally less risky but brings lower expected returns.
Target date funds are sorted by the approximate target date for when you may want to retire. For example, if you want to retire when you’re 65, and you turn 65 in 2039, that means you could pick the LifePath 2040 fund – the portfolio closest to the ‘target year.’ Each LifePath fund is designed to continuously reduce risk exposure over time. When it reaches its target yet, the assets in the funds will automatically move into LifePath Retirement, which is designed to provide the potential for income and moderate long-term growth for members during the retirement years.
Who provides target date funds for Common Wealth?
Common Wealth offers LifePath Target Date Funds from BlackRock, the world’s largest asset manager that pioneered target date funds in 1993. BlackRock has over $10 trillion USD in assets under management, including managing over C$275 billion in assets for Canadian clients.
With Common Wealth, you can choose from ten BlackRock target date fund options, all of which are highly diversified and less costly than the average Canadian mutual fund.1 The key difference among the target date fund options lies in the target retirement year that each fund has been constructed for and thus the corresponding asset allocation mix. BlackRock’s target date funds are a simple way to invest for retirement. The benefits of choosing to grow your retirement savings by investing it in a target date fund includes:
- Having access to a diversified asset allocation for as long as you are invested in the fund, helping you avoid overly risky or excessively conservative investments of your retirement savings with minimal effort on your part and at a low cost
- Automatic rebalancing for risk: risk is decreased as you approach retirement
- Automatic rebalancing for asset allocation: to help mitigate against swings in the markets
1 Morningstar, “Global Fund Investor Experience Study” (2019)