You Are Not a Single Factor Human! So Why Invest in Target Date Funds?

Last week, my daughter made her first contribution to her retirement savings!! (Double exclamation points entirely warranted…it’s a huge deal, deserving celebration!) She’s 17, and a barista at Starbucks. They match 100% of her contribution up to the first 5% of eligible pay and it’s immediately 100% vested. It’s an incredible benefit and I couldn’t wait for her to begin saving. Like many other retirement plans, they defaulted her investment selection to a target date fund based on her presumed year of retirement…2070. 

Target date funds have gained popularity for their simplicity and automation. They are structured around one factor, the age at which you might retire…for Maya, they’re assuming she’ll be 64. The only issue with this approach is that humans are not single-factor entities. A financial identity is a multifaceted tapestry, woven with threads of values, attitudes, relationships, risk tolerance, and non-age-dependent goals. Target date funds hinge solely on one factor—age. It’s important to shed light on the importance of understanding the diverse dimensions of your financial self to make the most of your money.

The Rise of Target Date Funds

Target date funds have become the go-to investment vehicle for many, offering a simplified approach to retirement planning. The fundamental principle is straightforward: as you approach your retirement, the fund adjusts its asset allocation to become more conservative, mitigating risk. For a younger investor with time on their side, the allocation overweights growth stocks, and over time, balances out, eventually allocating more toward fixed income to protect the money in the account. This strategy is primarily anchored in the assumption that age is the sole determinant of an individual's risk tolerance and financial goals.

The Single-Factor Approach

The simplicity of target date funds is appealing, and has undoubtedly eliminated confusion and overwhelm for thousands, or maybe even millions of people that prefer to avoid the painstaking selection of their own investment allocations from the choices in the 401k (or other tax beneficial employer-provided retirement benefit) menu of options. It’s impossible, however, to guess where your hard earned dollars are invested in a product opaquely called “Target Date 2070.” What types of companies are in there, how suitable are they for you? Many target date funds (including the one in the Starbucks 401k menu) are funds of funds, holding multiple index funds that mix and match broad allocations of US and International equities and bonds. 

Embrace Multidimensionality

Imagine every 17 year old in the United States wearing the exact same outfit. It may be a style that society deems “age appropriate,” but each person would strive for unique individual expression. Your individual style reflects your interests, values, hobbies, materials you find most comfortable, status, mood, beliefs, geolocation, and more! Relying solely on age as a determining factor neglects the vast intricacies that shape your financial identity. Human experiences, values, and attitudes toward money are nuanced and can significantly vary, even among individuals of the same age group.

A Comprehensive, Human View of Your Financial Self

Enter the Knomee Financial Identity—an innovative concept that goes beyond the confines of age-based investment strategies. By delving into multiple dimensions of your financial life, and exploring your values, psychology, attitudes, goals, and visions for the future, Knomee seeks to empower individuals and their trusted providers to make informed and personalized decisions.

Values

Your values are the compass guiding your life, and your finances are a tool to help you along the journey. Values influence your spending habits, investment choices, and long-term goals. A target date fund doesn’t consider your intrinsic values. It can’t because the fund has no idea what your values are. The result is always going to be some degree of misalignment between your investments and what truly matters.

Knomee helps you reflect on your values, ensuring that financial decisions resonate with your beliefs and priorities. Are you interested in supporting sustainable investments, contributing to social causes, splurging on something important to you, or changing your income strategy to suit the lifestyle you desire? Informed by your unique financial identity, a holistic financial plan does a much better job at mapping your money to your short and long term goals.

Attitudes

In October, 2023, Dorothy Hoffner made headlines when she broke the record as the oldest living person to jump out of a plane at age 104. While age certainly influences risk tolerance, it is by no means the sole determinant. Life experiences, financial knowledge, and individual temperament all contribute to shaping your attitudes toward risk. Target date funds might oversimplify this complex relationship, potentially exposing you to unnecessary risk or limiting your growth potential.

Knomee's approach to risk assessment goes beyond age-based assumptions. By considering your unique combination of experiences and attitudes, Knomee provides a more accurate reflection of your risk profile, enabling you to make informed decisions aligned with your comfort level.

Relationships

Financial decisions often extend beyond individual concerns to encompass the well-being of your loved ones. Family dynamics, responsibilities, and shared goals contribute to the complex interplay of your financial life. Cultural traditions, diverse social norms, and religious customs play heavily into financial expectations. Target date funds overlook the impact of these relationships, neglecting crucial considerations that influence financial choices.

Knomee emphasizes the importance of incorporating relationship dynamics into financial planning. By recognizing the interconnectedness of your financial life with others, Knomee ensures that you can navigate your financial journeys with a comprehensive understanding of the impact on yourself and your loved ones.

Non-Age-Dependent Goals

You are always planning for multifaceted goals that extend beyond retirement. Educational pursuits, homeownership, travel aspirations, and entrepreneurship are non-age-dependent goals that contribute to the richness of your financial narrative. My own journey to entrepreneurship required years of cultivation. My realization that life is short and that I could shape my future even after 20+ years working in corporate environments liberated me to find purpose and meaning in my work. Target date funds, focused primarily on retirement, don’t adequately account for diverse aspirations.

Knomee encourages you to envision and plan for non-age-dependent goals. By articulating your aspirations, even the most audacious ones, you can make strategic financial decisions that encompass the entirety of your life journey, your way.

Conclusion

You’re not a single-factor human, so your money shouldn’t be working within a single factor framework. Give Knomee a try to illuminate the diverse dimensions that constitute your full financial self. By understanding your values, attitudes, relationships, and non-age-dependent goals, you empower yourself to craft a personalized and holistic financial plan—one that resonates with your unique narrative and aspirations. In embracing the richness of your financial identities, you transcend the confines of one-dimensional investment strategies, unlocking the potential for a more fulfilling and purpose-driven financial journey. Here’s hoping that you find loads of ways to express your unique individuality along the way!