If you want a simple, mostly hands-off way to invest for retirement, a target-date fund may be worth considering. These funds have become one of the most popular investment options, especially in workplace retirement plans like 401(k)s, where they’re often the default investment for employees who don’t choose their own. Here’s how they work and what to look for.
How target-date funds work
A target-date fund is named for a specific year, such as 2055 or 2065, roughly corresponding to when you expect to retire. If you plan to retire around 2060, you might choose a 2060 fund.
Each target-date fund holds a mix of investments, usually other stock and bond funds, creating a diversified portfolio in a single fund. The fund may include U.S. stocks, international stocks, bonds and sometimes other assets.
When the target year is far away, the fund usually holds more stocks to pursue long-term growth, since younger investors have time to recover from market declines. As the target year approaches, the fund gradually shifts toward more bonds and cash to reduce risk, aiming to protect savings as retirement nears.
Understanding the glide path
The planned shift in a fund’s mix of investments over time is called its glide path. Each fund family designs its own glide path, determining how aggressively the fund invests at different stages and how quickly it becomes more conservative.
Some funds keep adjusting their mix for years after the target date, continuing to become more conservative well into retirement. These are sometimes called through funds. Others reach their most conservative mix at the target date and stay there, sometimes called to funds.
This difference matters, since it affects how much risk you’re taking around and after retirement. The SEC suggests checking how a fund’s glide path works, including how much it holds in stocks at the target date, before investing.
The advantages
Target-date funds offer automatic diversification in one fund. Instead of choosing and managing several funds yourself, you get a broadly diversified portfolio with a single investment.
They provide automatic rebalancing. As markets move, the fund periodically adjusts its holdings to maintain its intended mix, so you don’t have to rebalance yourself.
They become more conservative as you age, following the glide path without any action on your part.
They’re easy to set and forget, making them well-suited to people who don’t want to spend time managing investments or who might be tempted to make emotional decisions during market swings. Research on investor behavior suggests that many people make costly mistakes by trading at the wrong times, and a hands-off approach can help avoid them.
Things to check before investing
Expense ratios vary widely between fund families. Some target-date funds built from low-cost index funds charge very low fees, while others that use actively managed funds may charge significantly more. Over decades, even small differences in fees can add up to large differences in your savings.
The glide path deserves attention too. Two funds with the same target year can hold very different amounts of stocks. One 2050 fund might hold considerably more stocks than another. Look at the fund’s current mix and how it will change over time to make sure it fits your comfort with risk.
Avoid doubling up. Target-date funds are designed to be a complete portfolio on their own. Holding a target-date fund plus many other funds can undo its built-in balance, potentially making your overall portfolio more aggressive or more concentrated than intended. If you use a target-date fund, many experts suggest making it your only or primary investment in that account.
Consider your personal situation. Target-date funds are based on general assumptions about investors retiring around the target year. If you have a pension, significant other assets, a very high or low tolerance for risk or plans to retire much earlier or later, a target-date fund’s approach might not fully match your needs. You can choose a fund with a different target year to adjust the level of risk.
No guarantees
Target-date funds can lose money, including near or after the target date, since they still hold stocks and bonds that fluctuate in value. During market downturns, investors in target-date funds near retirement have experienced losses. The target date indicates when the fund is designed for investors to retire, not a date when your money is guaranteed.
Target-date funds are designed to be one complete portfolio, not a guarantee of retirement income. They don’t ensure you’ll have enough saved for retirement, which depends on how much you contribute, how long you invest and market performance.
Are target-date funds right for you?
Target-date funds can be an excellent choice for investors who want simplicity, diversification and automatic adjustments without having to manage their portfolio actively. They’re particularly useful for beginners and for anyone who prefers a hands-off approach. Investors who want more control over their asset allocation, or who have more complex financial situations, may prefer to build their own portfolio or work with a financial adviser.
This article is for education only and isn’t investment advice.
Content on The Evergreen Edit is for educational and informational purposes only and is not individualized financial, investment, tax or legal advice. Learn more.
This article is for educational purposes only and isn't personalized financial, tax or legal advice. Consider talking with a qualified professional about your situation.
Kiara Miller — Founder & Editor
Kiara Miller is the founder and editor of The Evergreen Edit. He has been doing independent finance research for two decades and reviews every article before it's published.
More about Kiara →Get smarter about your money.
Join readers who get The Sunday Edit every week.
