Target-date funds (TDFs), available as mutual funds or ETFs, are designed to help grow retirement savings while managing risk over time. They typically begin with higher allocations to growth-oriented stocks and gradually move toward lower-risk investments like bonds and cash as the target retirement date nears.
TDF Popularity Is On Target
According to Vanguard’s How America Saves 2024 report, 94% of 401(k) plans offer target-date funds, and among plans that designate a default investment, nearly all use TDFs. Well-known consumer advocate, radio host, and author Clark Howard is also a fan, saying, “With target-date funds, you don’t have to do a thing other than invest your money. It could be the best and easiest investment choice you ever make.”
It’s hard to argue that TDFs aren’t an attractive option when used appropriately. They reduce the guesswork and help spare millions of people from the potential anxiety of managing a hands-on portfolio in a volatile market. This is particularly relevant in the accumulation phase of life, giving investors broad diversification and automatic rebalancing.
The Risks Of The Glide Path In Retirement
Despite their merits, target-date funds may not perfectly fit every financial situation, particularly as investors approach or enter retirement. During retirement, TDFs typically continue shifting toward more conservative investment allocations, which normally means reducing equity exposure while increasing bond holdings over time. Depending on the fund’s glide path, this may not always benefit the investor.
For example, a target-date fund structured to hold 55% in stocks and 45% in bonds at retirement may gradually shift over the next 30 years to a mix closer to 30% stocks and 70% bonds. While this may provide stability, such a conservative allocation could limit the growth potential needed to sustain a long retirement.
The Target Doesn’t Always Hit The Bullseye
Those familiar with my writing, podcast, or radio show know that the 4% rule can help guide retirement withdrawal planning. Popularized by William Bengen, this rule of thumb suggests that a retiree can withdraw about 4% of their starting portfolio each year, adjusted for inflation, with a high probability of the money lasting 30 years. It assumes a portfolio that maintains a meaningful equity allocation—historically at least 50%—to help preserve purchasing power over time.
A retiree who prefers a heavily bond-weighted portfolio may face the risk that it does not generate sufficient growth to support those types of withdrawals throughout a lengthy retirement. Bonds can provide stability and income, but they generally offer less appreciation than equities over decades.
Another Consideration: International Exposure
Many target-date funds include a significant allocation to international stocks—sometimes 30% or more of the equity portion. Retirees may not realize the potential volatility this introduces, particularly compared with a domestically focused investment vehicle.
Investors looking for a steadier approach might consider a semi-fixed balanced fund, which typically holds 50% to 60% in stocks and 40% to 50% in bonds. These funds maintain a consistent allocation over time, rather than gradually becoming more conservative by shifting to a higher allocation of bonds.
In retirement, such a balanced portfolio can work in tandem with “dry powder”—cash or short-term bonds set aside to cover 2–3 years of expenses. This liquidity buffer, combined with the growth and income from the balanced fund, may help retirees follow the 4% rule while keeping their assets potentially productive over the long term.
Bottom Line
Target-date funds can work well for many investors, especially as a starting point. However, as individuals move into retirement, it’s worth reviewing their allocations to ensure they still align with long-term goals. The beauty of a target-date fund lies in its automatic glide path, but investors may still need to step in occasionally to guide the portfolio’s rhythm and ensure it continues to support a sustainable, fulfilling, and lasting retirement.
This article is provided for informational purposes only and should not be regarded as personalized investment advice. Investors should seek advice from a qualified financial advisor about their specific situation prior to implementing an investment or retirement strategy.
Investment decisions should be based on individual financial needs, objectives, goals, time horizon, and risk tolerance. Individual results will vary based on market conditions, timing, tax circumstances, and portfolio customizations. There is no guarantee that any investment strategy discussed herein will work under all market conditions. Past performance does not guarantee future results.
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