Targeted-Distribution Funds: Replacing Retirement Plans?

Targeted-distribution funds are a unique form investment that focuses on the distribution, instead of the accumulation, of assets. Those that are facing retirement should consider adding targeted distribution funds to their portfolios. Here are the basics of targeted distribution funds and how they could benefit you in the future.

Targeted Funds

Many that have started to invest in 401(k)s over the last few years will be familiar with target funds. These funds are attached to a certain date and are basically a retirement investment plan based upon retiring around that date. For example, if you have a 2050 targeted fund, this means that all of your investment strategies will be based around retiring around the year 2050. Early on, the investment strategies will be a little more risky and be centered around growth. As you get closer to retirement, the investments are shifted to maintaining the portfolio and not risking it. Targeted distribution funds are very similar, except they center around the actual distribution process.

Retirement Check

Many investors consider a targeted distribution fund to be a retirement paycheck. The assets from the fund are distributed over a certain amount of time until the assets are all gone. During the distribution process, the assets are still invested and the performance of the assets determines how much of a paycheck the investors receive. Therefore, each month or year the investors can receive a distribution from the fund.

Unlike annuities or other retirement programs, these distributions are not guaranteed. Therefore, there is a certain level of risk involved with this investment. The distributions will vary from year to year and possibly month-to-month depending on the performance of the investments. Therefore, you never know how big your check will be or how long the payments will last.

Market Performance

This type of fund depends greatly upon the investment performance of the securities. If there were a large market downturn over a sustained period of time, the funds from this fund could be quickly eliminated. This should be a major consideration for those that are considering getting involved with this type of investment for a retirement solution.

Investment Considerations

The targeted distribution fund could be a worthwhile investment if you are nearing retirement. For some of the 77 million baby boomers that are almost to retirement age, this could be a very productive way to invest your money. It is designed to provide a regular paycheck once you hit retirement age. This could be a nice supplement to another retirement plan that you've been using.

However, this should not be your only source of income during retirement. Due to the unknown nature of how much you receive each month, it is difficult to count on this as income. This should be looked at as a part of a diversified retirement plan instead of the main component of the plan. Do your homework before investing in this type of fund and find out everything you can along the way. 

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