Target Date Retirement Funds

by Ryan Guina

One of the biggest hurdles for most investors is just starting. There is an overwhelming amount of information available, and many people are simply frozen into inaction. If you are one of the many people who find the hundreds of different options available for retirement planning a bit overwhelming, you might be interested in learning more about target-date retirement funds, which can be a great investment strategy for beginners.

The best plan for retirement should reflect your personal situation and long term goals, therefore it is important to learn as much as possible about all options before making a final decision.

Target Date Retirement Funds

target date retirement fundsTarget-date retirement funds, also known as Life-Cycle Funds, are designed to streamline the investment process and have often been termed “set it and forget it funds.” To put it simply, investors who opt to place their money in target-date retirement funds, do so with a specific retirement year in mind. For example, if you plan on retiring in 25 years, your target-date retirement fund should reflect that specific time frame.

The set it and forget it concept reflects the fact that once you invest in your target-date retirement fund, you don’t have to worry about the allocation of that fund as it will automatically change over the years to reflect a more conservative risk tolerance. This is a fairly common strategy for retirement investments where it becomes more important to save and protect your assets the closer you get to retirement, as you have fewer years remaining to recover should your investments take a turn for the worse.

This gradual reallocation over the years is known as the glide path. The target-date retirement funds glide path begins on a more aggressive level in the early years and changes toward a more conservative path with the intention of providing added security as the year of retirement approaches.

As with all other investment strategies there are both benefits and drawbacks that accompany target-date retirement funds. To determine if this type of investment is right for you it is important to understand these pros and cons and compare them to the advantages and disadvantages of other retirement vehicles. Here we look at what makes a target-date retirement fund a good choice and what might make it a bad choice.

Pros and Cons of Using Target Date Retirement Funds


  • Hands off investment strategy. Since target-date retirement funds are set up to automatically adjust the allocation of investments, there is little effort needed on the part of the investor once the fund has been established. This may appeal to investors who do not have the time or confidence needed to actively manage their portfolio.
  • Little to no maintenance. Due to the very nature of a target-date retirement fund, there is little if any maintenance required by the investor.
  • Minimum investment requirements. This allows for a broader allocation to include various asset classes.


  • There is no such thing as one-size-fits-all. You understand this concept when you buy clothing and you should certainly consider this when selecting an investment strategy. Each person is different with varying risk tolerance as well as financial goals. Unfortunately the very thing that makes target-date retirement funds hassle free also require that the strategy treat each portfolio the same way. This may result in an investment strategy that does not reflect your unique situation.
  • Higher fees. Expect to pay slightly higher fees for this type of investment than you might for other investment vehicles.

Where can you invest with Target Date Retirement Funds?

Target-date retirement funds are a popular option for many company provided retirement plans, such as 401k plans or the Thrift Savings Plan. You can also buy into a Life-cycle fund through various ETFs or mutual funds, which can be purchased just about anywhere that you can open an IRA.

Should you invest with Target Date Retirement Funds?

Life-cycle funds aren’t for everybody, but they are a great place to start for people who don’t know where to start investing, or and it can also be an investment strategy which appeals to individuals who prefer to not have to deal with managing their portfolio. Nevertheless, “hand’s off” doesn’t equal risk free. As with any other type of investment there is always the chance the strategy will not work out as intended. When buying into a target date fund or life-cycle fund, you should do the research to fully understand where and how your money is invested and how it affects your asset allocation.

Photo credit: ogimogi

Published or updated October 1, 2012.
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{ 16 comments… read them below or add one }

1 Doug Warshauer

Nice summary of target date funds. They certainly have their place for someone who wants to not have to think too much about their asset allocation. Using one of these funds is certainly a better choice than staying in all cash.

I can think of one additional drawback to using one of these funds. The asset allocation shifts automatically as you age without taking into account the recent performance of the asset class. Thus, through sheer bad luck you may end up selling at the bottom of the market. If for example, you reached a trigger point to reallocate in early 2009, you would have sold your stocks at exactly the worst time.

Of course, lots of people chose to sell at that point on their own – so you could argue that these funds actually decrease the chances that you’ll sell at a market bottom by automating the decision. That may be true for some people, but for those who want to maximize the effectiveness of their retirement investing, forced reallocation at arbitrary times make these funds a less than ideal choice.


2 Ryan

Doug, that’s a great point – target date funds may cause one to sell at the bottom of the market. I don’t think target date funds are a one-size-fits-all approach to investing for that, and other reasons.

But I do think target date funds are a great place to start for someone who doesn’t have any background in investing and doesn’t know where to start. Once you can understand how target date funds work, it is easy to learn to apply those principles across an entire portfolio.


3 basicmoneytips

I am not a big fan of target date retirement funds. I think people need to be hands on, learning what they can about investments and where their money is going. Don’t be lazy and pay extra fees for no reason, take the bull by the horns and do your own research. That’s my vote.


4 Ryan

BMT, I don’t currently use target date funds, but I did for a few months when I started out investing. Why? Because I didn’t have much knowledge or information about investing and buying into a target date fund allowed me to diversify my (very small) portfolio and I learned more about asset allocation in the process.

I don’t believe target date funds are a one-size-fits-all investment, but I think they have their place – especially for first time investors and those who don’t have the money to build a well diversified portfolio from scratch. (keep in mind that many mutual fund firms require a several thousand dollar minimum investment to open an account).

Long term, I learned more about investing and moved away from target date funds, which is what I would recommend for most people. But if it comes down to not investing because someone doesn’t know where to start, or investing in target date funds, then I recommend target date funds hands down.


5 cheapskate sandy

One of my colleagues has her ENTIRE retirement in one of these funds. The problem is that when the market tanked all of her money was wrapped up in this one thing and she lost 40%. However, I recognize that its an option for people with no idea what to do for retirement.


6 Ryan

Sandy, A lot of people lost 40% of their assets, not just those with target date funds. I was slow to reallocate my holdings as well, and I lost a lot of money, even though I wasn’t in target date funds.

Most people aren’t very hands on with their investments, so for someone who simply doesn’t know how else to invest, target date funds can fill the void. They definitely aren’t for everyone, but can be a great place to start.


7 Jarhead

The problem that I have with the target dates funds available to me is that I feel they are to conservative. I will do a 20 year career in the military and will have a pension equal to half my base pay in another 5 years. That is cash in hand every month with COLA increases every year. Therefore all the money I have in my TSP (military version of the 401K) in the three stock funds that are available to me. Once I get a little bit older (and more money in the account) I am sure that I will get a little more conservative but not to the point that the target date funds are as I will consistently have a cash inflow for the rest of my life.


8 Ryan

Great point, Jarhead. There are three methods you can use to combat this: 1.) Ignore target date funds and create your own asset allocation, 2.) augment your investments with additional mutual funds, index funds, or stocks to reach your desired asset allocation (keeping in mind that this more or less defeats the purpose of using a target date fund), and 3.) adjust your target date toward the future each time a new target range becomes available. For example, even if you plan on retiring in 2030, use 2040 or 2050 as your target date, which should be more aggressive.


9 Steven

Does it cost money to switch from a life-cycle fund to other mutual funds within vanguard or other companies?


10 Ryan

Steven, Most mutual fund firms like Vanguard don’t have associated transaction costs with the funds they own, but there may be costs if you buy a fund that is not in their family of funds. I recommend contacting the firm and asking about possible fees before making any transactions – that way you know what your expenses (if any) will be.


11 Tim Rosen

I appreciate you stating some “Cons” to give caution to readers. I agree with Doug, anytime to trust your money in a computer-generated, or formulaic investment process, it cannot factor in “outside” activity such as the “Credit Crisis”, where that sector took such a hit.

Now I am a Huge proponent of staying put once properly allocated and Not react to short-term downturns in the market; but the average 401(k) participant does not have the discipline and emotional strength to wait it out, leading them to break the Cardinal Rules of investing: selling when values go down, switching funds, etc.(Dalbar Research, Dec 2008)

Lastly, to dove-tail on the “Con” presented, “Higher Fees”, I have witnessed many Target Funds consisting of 12-16 mutual funds by the same Mutual Fund Family, resulting in: Overlap of holdings and extremely high turnover (translates to excessive transaction fees and Bid/Ask spread costs). Not a big fan of Target Date funds, If possible a participant could seek out un-biased advice as to how to allocate their funds in the plan, then stay put.

Thank you for posting such an important topical post!


12 Ally

Quick question:
I am thinking about investing the LIVESTRONG Century 2045 mutual fund.

I have other investments in retirement mainly in ISHARES and SPIDER ETF, but I thought I should add on a mutual fund for diversity.

By 2045 I will be 63, not 65. I plan to retire when I’m 65 and withdraw the money from my ROTH IRA. I’m wondering, will the fund stop working by 2045, and then just sit there idle until i withdraw two years later when I am 65?
I imagine I could withraw it in 2045 but then I would be paying a penalty for withdrawing before I’m 65.

Any clarity would be appreciated.


13 Ryan

Ally, no, the fund won’t stop working once the date is reached, typically by the time the year of the fund is reached, everything in the fund is in an income fund, where almost everything is in money market funds or similar low risk investments designed to preserve your money instead of make much money. At this point you should be safe to put your money in a 2045 fund and you can reassess your financial goals as you get closer to retirement age.


14 Ally

Thank you for that Ryan,
The main reason I am interested in the Target Date Mutual Funds is because I’m trying to diversify my ROTH IRA portfolio. I’m 28 and just opened my first ROTH account, and have decided to invest in a SPIDER ETF, 4 ISHARES and 1 Mutual Fund (the target date one) hoping that this adds up to a diverse portfolio.

Do you think its diverse enough without the mutual fund, or is it always good to have a mutual fund in there?


15 Ryan

Ally, I think you may be trying to do a little too much work. By definition, Target Date funds are already diversified for your proposed retirement date. Adding another mutual fund or other investments changes your diversification. I wrote an article about this topic for US News, which you can read here: Diversify Your Portfolio, Not Each Investment Account.

When dealing with Target Date funds, it’s important to recognize how they affect your entire portfolio, not just your Roth IRA or another account. I hope this helps.


16 Ally

Thanks again Ryan.
I’ll admit that its all a little confusing but I think I’m getting it slowly. I think I got a little panicked when I realized I’m 28 and still don’t have a retirement plan.

I tried the Sharebuilder ROTH IRA Retirement tool which assists you in figuring out how and what to invest in. It came up with splitting up my monthly deposit into the 4 ISHARES. I added the S&P Spider ETF after talking to a few people about it. Initially I thought that this all seems good enough, but then i heard a lot of talk about having a target mutual fund.

From your article I think it might be better then to (when I’m ready) open up a separate account where I would invest in a mutual fund and in that way I would be creating a more diverse investment portfolio.
I have a 401(k) with one of my employers but since I am an actor I only work with this particular league of theatres for a few months every year, and so its not like I’m investing all that much into it.

Currently I have
Sharebuilder ROTH IRA (with all the ISHARES and ETF)
401K (Target year Mutual Fund)
My wife has a Fidelity ROTH IRA (Mutual Funds)

In a few months I could open a second ROTH IRA where I am investing in a mutual fund more aggressively.

Thank you for the article, it was very helpful, and for dealing with this long message!



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