Key Takeaways
- A target-date fund is a single fund built around the year you expect to retire.
- It starts with more stocks and gradually shifts toward bonds and cash as that year approaches.
- This gradual shift is called the glide path, and it differs between fund companies.
- Target-date funds are designed to be your whole retirement portfolio, not one piece of it.
If choosing between dozens of funds in your 401(k) feels overwhelming, a target-date fund may be the simplest option on the menu. With one choice, you get a diversified portfolio that adjusts itself as you get closer to retirement.
How Target-Date Funds Work
Each fund carries a year in its name, such as a 2060 fund for someone planning to retire around 2060. When retirement is decades away, the fund holds mostly stocks for growth. As the target year gets closer, it gradually moves more money into bonds and other lower-volatility investments to reduce the impact of a market drop right before or during retirement.
Most target-date funds are funds of funds: they hold several underlying index or active funds covering U.S. stocks, international stocks, and bonds, and rebalance automatically.
Understanding the Glide Path
The glide path is the planned schedule for shifting from stocks to bonds. Two funds with the same target year can have different glide paths. Some become conservative at the target date; others keep adjusting for years into retirement. Read the fund’s description so you know how much stock it will hold as you near retirement.
Benefits
- One decision gives you a diversified portfolio.
- Automatic rebalancing keeps your mix on track.
- Risk is reduced gradually as you age, without you having to act.
- Helps avoid common mistakes like chasing performance.
Drawbacks
- Costs vary widely; some target-date funds are built from low-cost index funds, others from pricier active funds.
- The allocation is based on age, not your personal situation or risk tolerance.
- Holding a target-date fund alongside many other funds can throw off the intended mix.
How to Choose One
Pick the year closest to when you expect to retire, then compare the expense ratio and glide path of the options available to you. If you are more or less comfortable with risk than average, some investors choose a fund a few years later (more stocks) or earlier (fewer stocks).
Example: Two Investors, One Decision Each
A 25-year-old picks a 2065 fund. Today it might hold around 90% stocks, aiming for growth over four decades.
A 58-year-old picks a 2030 fund. Today it might hold closer to half in stocks and half in bonds and cash, to cushion a market drop near retirement.
Neither investor has to rebalance or change funds as they age. The exact mixes vary by fund company, so check each fund’s current allocation.
Examples are hypothetical and for illustration only. Returns are not guaranteed, and real results will vary.
Frequently Asked Questions
Can I use a target-date fund in an IRA?
Yes. Many brokers offer target-date funds or similar ETFs that can be held in an IRA.
Should I hold other funds alongside a target-date fund?
These funds are designed as an all-in-one portfolio. Adding many other funds can make your overall mix riskier or more conservative than intended.
Do target-date funds guarantee income in retirement?
No. They can lose money, including near and after the target date.
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