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TWO MINUTE MONEY: Target date funds make retirement planning less painful

Welcome to Two Minute Money, Yahoo Finance’s new personal finance series offering quick explanations for some of the most important questions involving your money. 

You’ve got a lot on your plate, and saving for retirement is just another thing to add to your growing list—but it’s actually pretty easy.

When you start your first job with benefits, the company might offer you a 401(k) retirement account.

You might feel overwhelmed by all the different ways you can contribute. But there’s an easy way: Meet the target date fund.

A target date fund is a long-term retirement account that resets the mix of stocks and bonds over the lifetime of the fund.

Target date funds usually reallocate your investments in five-year increments. When you’re young and first invest in a target date fund, you’ll likely be invested mostly in stocks. Stocks are typically riskier than bonds, but they can allow your investment to grow more aggressively.

As you get closer to retirement—or the target date of the fund—the assets gradually shift from being mostly stocks to mostly bonds. Bonds are more predictable investments. That’s good for closer to retirement, when you’re more focused on keeping wealth rather than risk trying to grow it.

If you want to play it safe, the target date fund is all you’ll need to keep your 401(k) in shape.

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Set it and forget it

Financial experts say the best thing you can do with your retirement savings is to leave them alone.

Leaving your money in a passively-managed fund, like a target date fund, will, on average, earn you about 3% more in annual returns than if you moved your investments around on your own. Over time, that can add up to several thousand bucks.

The biggest mistake investors make with target date funds is moving money out of the fund and attempting to invest it on their own.

Target date funds aren’t perfect

Because management of the funds is automated, they can be slower to react to short-term shifts in the market. Don’t panic! Every investment is subject to the whims of the market.

Historically, over long periods of time—like the time your target date fund will take to mature—the market grows. Since you likely have 40 or more years for your fund to mature, you’ll likely recover any losses.

Another plus—the fees are much lower than actively-managed funds, which can cost 10 times more than target date funds.

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Sixty-two percent of investors think they can make smarter investments on their own, even though the evidence suggests otherwise. Be like the other 38%, and keep your money where it can grow more consistently.

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