What are target-date funds and should you invest in one?

When do you want to retire? That’s pretty much the only question you need to answer if you invest in a target-date fund. Target-date funds are ready-made investment portfolios that experts manage over time so you don’t have to. Investing in one can be a great way to make retirement planning easy. But is it the right way for you?

What are target-date funds?

A target-date fund (TDF), sometimes called a retirement date fund, is a single fund that’s made up of a variety of other funds. The mix of funds is designed and managed by investment experts focused on maximizing the amount of money you have in the fund on the date you retire. 

How do target-date funds work?

Let’s break this down a bit.

  • The target date is usually in the name of the fund. It’s the year that the fund’s investment strategy focuses on—the year (or close to it) that people who invest in the fund hope to retire. 
  • Most TDFs are funds of funds, meaning each TDF is a single fund made up of a selection of underlying market-based funds.
  • As with any market-based investment, TDF returns aren’t guaranteed.
  • A fund manager—often a financial institution staffed with investment experts—chooses the underlying funds and adjusts them over the lifecycle of the TDF. 
  • The fund manager makes sure the underlying fund mix is:
    • Diversified across asset classes—Includes a variety of investments of different types, industries, and countries, as well as different exposures to risk, from riskier equities to less-risky fixed income 
    • Less risky over time—Includes more equities early on to help your savings grow and more fixed income closer to the target date to help protect what you’ve saved 
  • All target-date funds aim to lower your investment risk over time, but no two TDFs are alike—even TDFs with the same target date can have very different fund mixes, which can affect how risky they are and how they’ll perform at any given time. 

How do you invest in a target-date fund? 

It’s pretty simple: 

Step 1

Decide on when you want to retire (your target date). 

Step 2

Sign in to your online account to learn about any target-date funds your plan offers.

Step 3

Choose the fund with the date closest to when you want to retire. Target-date funds are usually offered in five-year increments, so if you wanted to retire in 2048, you’d pick the 2050 fund. 

Step 4

Invest 100% of your savings in the target-date fund you chose. 

Why 100%? TDFs are designed to work best when you invest in just one TDF and nothing else. The TDF’s fund manager—aiming to make the most of your money for the date you want to retire—has already diversified your savings within the fund.

Step 5

Check in now and then—and especially if the date you want to retire changes—to confirm that you’re still happy with the fund’s performance and investment strategy.

Can you set it and forget it? It’s true that TDFs are designed to be more of a set it and forget it option. But just like all investment decisions you make, it’s important to check in from time to time to make sure your choice still meets your needs.

Are target-date funds good when markets are bad?

Target-date funds are market-based funds, and markets go through cycles—sometimes you make more than you expect, sometimes less. In general though, investing over the long term (something TDFs are specifically designed for) can help you make the most of market volatility

Is a target-date fund right for you?

To figure out if a more ready-made approach, such as a target-date fund, is the best option for you, ask yourself: 

  • How much time do you have to focus on investing?
  • How much do you know about investing?
  • How interested are you in investing?

If you don’t have the time, knowledge, or interest in managing your investments, a TDF may be right for you. Just remember that no two TDFs are alike, so be sure to consider how you feel about the fund’s investment strategy, historical performance, and fees before you decide. 

And of course, talk to a financial expert you trust—always a good idea when it comes to saving for the future you dream of.

The commentary in this publication is for general information only and should not be considered legal, financial, or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.