Saving for retirement can be challenging. Between deciding how much to invest, managing risk and adjusting your investments over time, it’s easy to feel overwhelmed. That’s why target-date funds (TDFs) have become an increasingly popular solution for retirement investors seeking simplicity and convenience.
What Is a Target-Date Fund?
At its core, a target-date fund is a mutual fund or exchange-traded fund designed specifically with your retirement date in mind. TDFs simplify retirement investing by automatically adjusting the mix of stocks, bonds and other investments as you approach your retirement year—the "target date."
You’ll typically recognize these funds by their names, which include a target retirement year (e.g., 2045 Fund or 2060 Fund). This date represents approximately when an investor expects to retire and start withdrawing money.
How Do Target-Date Funds Work?
The defining feature of a target-date fund is its "glide path"—a strategic shift in asset allocation over time. This gradual rebalancing moves from higher-risk investments (like stocks) to lower-risk investments (like bonds and cash equivalents) as you approach your retirement year.
Early on, when retirement is still decades away, a TDF typically prioritizes growth with a heavy allocation of stocks. As you get closer to retirement, the fund gradually reduces risk by shifting to more stable assets like bonds.
For example, a TDF intended for someone retiring in 2050 might start with 90% invested in stocks and 10% in bonds. Over time, this ratio shifts, potentially reaching 50% stocks and 50% bonds as the target date approaches. By retirement, the allocation might shift even further toward safer investments to protect the accumulated savings.
READ MORE: Stocks vs. Bonds: Key Differences and Strategies Explained
Are Target-Date Funds Good?
They can be! Target-date funds are great for hands-off investors—they offer built-in diversification, automatic rebalancing and risk adjustment as you approach retirement. But they’re not personalized, and fees or glide paths vary, so they’re not perfect for everyone.
It’s important to weigh the pros and cons before deciding if a TDF fits your financial plan—which we’ll tackle next.
Advantages of Using Target-Date Funds
Target-date funds come with several built-in benefits that make them especially attractive for hands-off investors and retirement planners alike.
Simplicity and ease of use
Target-date funds offer investors a true "set it and forget it" approach. Instead of having to constantly monitor your portfolio, a TDF automatically adjusts your asset mix over time, saving you time (and likely a few gray hairs!).
Automatic rebalancing
TDFs handle the complexities of rebalancing your investment mix. Regular rebalancing ensures that your portfolio stays aligned with your goals without needing active involvement on your part.
Built-in diversification
A single target-date fund provides instant diversification by spreading your investment across multiple asset classes, sectors and geographic regions. This built-in diversification helps reduce overall risk and market volatility—something that’s tough to achieve on your own without juggling a dozen different funds.
Potential for retirement readiness
Target-date funds promote disciplined saving and investing by automating asset allocation and rebalancing. This hands-off approach reduces the temptation to react emotionally to short-term market swings—helping you stay focused on your long-term retirement goals.
Important Considerations and Potential Drawbacks
While target-date funds offer convenience, they also have limitations worth understanding:
Fees and expenses
TDFs typically charge management fees, which can vary widely depending on the provider and whether the fund is actively or passively managed. Over time, higher fees can substantially reduce your investment returns, especially in long-term retirement accounts. Always review the fund’s expense ratio and compare it to similar options. Generally, the lower the fee, the more your money stays invested and compounds.
One-size-fits-all approach
Target-date funds are designed for the average investor, using age as the main factor to determine asset allocation. While convenient, this standardized approach doesn’t account for individual differences in risk tolerance, financial circumstances, outside assets or retirement goals. If your financial situation is more complex—or if you want greater control over your strategy—you may benefit from more personalized financial planning.
Glide path differences
Not all target-date funds follow the same glide path—the schedule that determines how the fund gradually shifts from stocks to bonds over time. Some TDFs remain more aggressive longer, while others become conservative sooner. These differences can significantly impact your investment risk as you age, so it’s essential to understand your fund’s glide path and ensure it aligns with your comfort level and retirement plans.
Performance variability
The performance of target-date funds can vary widely, even among funds with the same target retirement year. Differences in glide paths, asset allocation strategies and active vs. passive management all contribute to these discrepancies.
Before investing, compare the historical performance and risk profiles of multiple TDFs to understand how they’ve handled different market conditions. While past returns aren’t a guarantee of future results, they can offer valuable insight into a fund’s behavior and volatility.
How To Choose a Target-Date Fund
Not all target-date funds are created equal. The right one for you is the fund that aligns with your risk tolerance, investment style and retirement timeline. Before investing, ask yourself:
- Does the fund align with my planned retirement year?
- Am I comfortable with the fund’s level of risk?
- Are the fees competitive and clearly disclosed?
When choosing the right fund, look beyond the target year and evaluate a few key factors:
- Expense ratios: Lower fees help preserve your returns over time—but be sure to weigh the cost against what the fund delivers.
- Fund performance: Review historical performance to see how the fund has behaved in different markets, but remember: Past performance isn’t a guarantee of future results.
- Glide path: Ensure the fund’s shift from stocks to bonds matches your risk tolerance and retirement goals.
- Investment company: Choose reputable fund providers known for reliability, transparency and customer support.
How Can You Buy Target-Date Funds?
Buying a target-date fund is straightforward, and you don’t need a finance degree to get started. You can buy TDFs through your 401(k), IRA or any major online brokerage. They’re often available in workplace retirement plans or directly from providers. You can also invest in them with the help of a robo-advisor or financial advisor. Just be sure to review the fund’s fees, investment strategy and glide path before you commit.
Alternatives to Target-Date Funds
While target-date funds offer simplicity and automation, they aren’t your only option. Depending on your needs, other strategies may provide greater flexibility or personalization:
- Managed accounts: These personalized investment portfolios are managed by professionals who tailor the investment strategy to your specific goals, risk tolerance and financial situation. They can be ideal for investors who want a hands-off approach but more customization than a TDF offers.
- Personalized portfolios: Working with a financial advisor, you can build a portfolio that aligns precisely with your retirement timeline, income needs and broader financial picture.
- Other balanced funds: These funds combine stocks, bonds and other asset classes but without the automatic shift in asset allocation over time. They require more active management from the investor but offer greater flexibility.
Should I Invest in Target-Date Funds?
Target-date funds are an excellent retirement investment option for individuals seeking simplicity, diversification and automated management. But like any tool, they have limitations—and they’re not the perfect fit for everyone.
Understanding how target-date funds operate, their advantages and potential drawbacks, and how they align with your financial goals is crucial before jumping in. If you’re unsure, a financial advisor can help you evaluate whether a TDF or an alternative approach is the best path forward. At the end of the day, the right investment strategy is the one that fits your lifestyle, risk tolerance and long-term retirement goals—and keeps you sleeping soundly at night.
READ MORE: How Do I Research a Stock Before Investing?
