Target Date Funds: An Overview

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Target-date funds are a popular choice for people who are planning ahead for long-term retirement savings.

But what are target-date funds, and why are they beneficial? Let’s take a deep dive to determine whether this asset class is an investment product that makes sense for your portfolio.

What Are Target-Date Funds?

A target-date fund — or life-cycle fund —  is a type of diverse fund made up of many individual investments that are strategically designed to change as a person nears retirement age. This type of fund uses a fund of funds structure, meaning it invests in other funds (e.g., like index funds and money market funds).

There are two types of target-date funds available to plan participants.

Target Date

Target date retirement funds are strategically built around the assumption that you are going to retire in a certain year. For example, a fund may be built so that you can retire in 2055. As such, target-date portfolios are generally considered lower-risk investments.

Target Risk

Target-risk funds give investors different options depending on their overall risk tolerance. For example, there may be options for conservative, moderate, and aggressive investors.

The nice part about target risk funds is they let investors change their track when their needs change. For example, you may start with some conservative investments and switch to a more aggressive track when you reach the middle of your career.

What Do Target-Date Funds Contain?

Most investors start by investing in high-risk, high-reward target-date funds. As they reach retirement age, they shift to more conservative investment options to reduce their risk.

With that in mind, here is an overview of what you can expect to find in a target-date fund.

Mutual Funds

Mutual funds are collections of securities: a mix of stocks, bonds, and other types of assets. By investing in a mutual fund, you are investing in an array of companies instead of just buying shares in a single organization.

Exchange-Traded Funds (ETFs)

An ETF is another type of fund that brings together multiple types of securities, providing a broad range of options for investors. ETFs are bought and sold on the market like regular stocks.

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A bond is a fixed debt instrument where a bond issuer agrees to pay the fund back to the customer with interest. Bonds have a defined term, i.e., a specific date at which they’ll reach maturity and can be redeemed.

Individual Stocks

In addition, target-date funds may also contain individual stocks from companies. Buying a stock is like owning a small piece of a publicly-traded company.

The stock market has a high level of volatility. As such, most target-date funds only have stocks when they are far away from maturity.

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How Target-Date Funds Are Managed

Target-date funds are run by dedicated portfolio managers. These portfolio managers put together funds based on the level of risk that the fund is set against.

In addition, portfolio managers are tasked with monitoring the fund’s progress and rebalancing the account on an annual basis.

Pros of Target-Date Funds


One of the best parts about investing in a target-date fund is that it can provide exposure to many types of markets and securities, making it a great component in a diversified portfolio.

As such, this can reduce risk while enabling you to maximize growth.


Another advantage to using a target-date fund is that you can set it and forget it for many years. This type of fund requires little to no management from investors, as it’s designed to enable a hands-off approach.

That being the case, these funds are an excellent option for investors who do not have the knowledge or experience to manage their own portfolios.

Regular Rebalancing

As an investor, your needs are going to change as you get older. Good news: A target-date fund is periodically rebalanced accordingly to match your changing needs.

What is a Glide Path?

A glide path describes the way that a portfolio’s allocation shifts over time. As an investor, you won’t have to worry about this process. It happens automatically in the background thanks to the team of managers that is overseeing your fund.

Cons of Target-Date Funds

High Fees

Before deciding to invest in a target-date fund, it’s important to understand how the fee structure is set up. Oftentimes, target-date funds have multiple fee structures that can revolve around the various investments in each portfolio.

For example, if the fund includes mutual funds and ETFs, each individual account has its own set of fees to consider. These can be confusing to figure out — and they can add up to a significant value over time.

Take a careful look at each fund’s fee structure and expense ratio in the summary prospectus to make sure you aren’t being overcharged for an account. Otherwise, you could be in for a surprise when fees continue eating up more and more of your money.

Human Error

Another thing to consider is that target-date funds may underperform due to human error. It’s a good idea to take a look at the fund manager and consider their past performance with other accounts.

Potential for Under-Funding

Don’t assume that a time-date fund is going to automatically fund your retirement. Nothing is guaranteed in the stock market, after all.

And even if you pick a fund that ends up performing well, you’ll also have to put an appropriate amount of money into it. If you underfund your nest egg, it may not be able to support you when you reach retirement age.

To avoid this outcome, consider working with a financial advisor to determine how much you need to put into the fund so that it can meet your needs during your retirement years. And remember, you don’t need to put all of your money into one fund. For the best results, consider diversifying into many funds.

Frequently Asked Questions

What is a through fund?

A through fund is a type of retirement fund that automatically reallocates a fund’s holdings to another set of assets after the account owner reaches retirement. This is an excellent way for an account owner to transition from their working years to retirement while keeping their money safer.

How does a glide path work?

A glide path is an allocation structure that allows a fund to switch courses over time. Most target-date funds are structured to become more conservative as you get older. As such, the glide path usually reflects a fund’s lessening reliance on equities as it inches closer to the target date.

As the target date nears, the fund becomes more heavily focused on cash and fixed-income investments — reducing risk for the investor and protecting them from volatility.

Where can you access a time-date fund?

You can purchase time-date funds through stock brokers like Vanguard, Fidelity, American Funds, Morningstar, and T. Rowe Price.

Keep in mind that brokers have varying expense ratios, minimum investment requirements, and annual returns to consider. Shop around for a fund that works best for your individual needs to get the best deal before agreeing to anything.

How do time-date funds align with other investments?

Certain financial planners recommend you only invest in a single time-date fund when planning for retirement, to avoid interfering with your overall portfolio allocation. However, this type of question is best answered by a personal financial advisor with visibility into your personal situation.

In short, you can use a target-date fund as a “one-and-done” type of investment, making it a lot easier to plan for your future.

Can you invest on the side while planning for retirement?

A target-date fund is an example of a type of retirement plan. It’s designed to grow over time. As a result, consumers are encouraged to do additional investing on the side using a brokerage account.

TIP: If you haven’t started investing in individual stocks, check out some of the best stock trading apps to get started.

If you decide to go this route, remember that you have to pay taxes on capital gains and dividends as you go along. However, you can sell your positions and access the money at any time. It’s an excellent way to fund initiatives that you want to pursue prior to retirement age, like launching a business, planning to travel, or investing in real estate.

Should I rely on Social Security in retirement?

Best practices call for using Social Security to supplement your income during your retirement years. Banking on Social Security is very risky because it can be difficult to determine what you are eligible for, if that will be enough to live on, and whether it is still going to be around in the coming decades.

The best way to treat Social Security is to forget that it exists and do your own financial planning instead. This is a surefire way to make sure you are set up for a safe and comfortable retirement. And assuming Social Security payouts are still a thing when you retire, it’ll be almost like a bonus of sorts.

The Bottom Line

Purchasing a target-date fund is a great investment strategy that everyone who is planning for retirement should consider. It can help you meet your investment objectives over time, supplementing your additional retirement vehicles and other accounts.

Investors love using target-date funds because they can help grow retirement income while providing allocation flexibility. The fund automatically adjusts as your situation changes over time.

If you decide to use a target-date fund, remember to check in on how it’s performing along the way. Even though it’s technically something that you can set and forget, you’ll want to make sure everything is going according to plan every now and again.

If things aren’t going as you’d like, you may want to change your plan halfway through your career and rollover your funds into a better offering. The last thing you want to do is wait until retirement age to discover that your plan is underperforming.

Above all else, remember to keep funding your investment accounts. The more you put into your account during your prime earning years, the better position you’ll be in as you approach retirement age.

Underfunded accounts are one of the top reasons people retire destitute and have to go back to work. By keeping tabs on your retirement accounts, making sure they’re adequately funded, and being patient, you can avoid ending up in that position.

Here’s to putting together a retirement plan that helps you reach your long-term financial goals!

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