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BlackRock’s purpose is to help more and more people experience financial well-being. As a fiduciary to investors and a leading provider of financial technology, our clients turn to us for the solutions they need when planning for their most important goals. As of June 30, 2019, the firm managed approximately $6.84 trillion in assets on behalf of investors worldwide.

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What are target date funds?

Target date funds (TDFs) mix several different types of stocks, bonds and other investments to help you take more risks when you’re young, and gradually get more conservative in your investment strategy over time.

Simply put, target date funds help take the guesswork out of saving for retirement. They are typically the best investment strategies for most people planning for retirement, because they provide a diversified mix of equities and fixed income that rebalances over time.

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    Why is picking investments in your retirement savings plan so hard?

    Maybe it’s because your perspective changes overtime.

    When we’re young, we have years ahead of us so we can take more risk as we weather the typical ups and downs of the equity markets.

    But as we get older, and we can actually imagine ourselves reaching retirement one day we typically start thinking about reining in the risk to help protect our savings.

    Target date funds seek to do just that.

    They offer a diversified mix of equities and fixed income that rebalance over time. So whether someone is at the start of a career, well into retirement, or somewhere in-between, target date funds are designed to make retirement investing easier.

How do target date funds work?

Investors can take more risk when they’re younger, as they can weather the typical ups and downs of the stock market over a long term horizon. But as investors get close to their retirement, the fund moves toward lower risk options accordingly. Target date funds can be actively managed or passively designed against indices or pre-set benchmarks.

To put this thinking in context, a 22-year-old teacher planning to retire at age 66 might invest in a target date 2060 fund. The target date in the name of the fund is the approximate date that an investor plans to start withdrawing money. Over time, as the teacher moves closer to the target date (2060), a portfolio manager will rebalance the fund so that it becomes more conservative, with fewer equities and more fixed income. The principal value is not guaranteed at any time, including at the target date. Because of this, it’s important to know how your target date fund is set up and that you monitor your investments, whether personal or through your employer, as this investment strategy is quite common through workplace retirement plans.

In a managed fund, a portfolio manager would manage investment options with a tool called a “glidepath” to adjust the underlying mix of investments that make up your target date fund. A glidepath is like an investment roadmap. It helps determine what the risk exposure in your fund should be over the course of your career. Learn more about how a glidepath evaluates different investment products in building out a target date fund.

What is a glidepath?

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    If you're thinking about investing in a target date fund, you're probably going to hear the word "glidepath."

    A glidepath is as an investment roadmap that a target date fund uses to take you from the beginning of your career all the way into retirement.

    Along the way the glidepath maps out a mix of stocks, bonds and other investments that is appropriate based on the target date.

    Early on in a career, retirement is decades away, so it may make sense to capture growth. That’s why the glidepath starts with a diversified mix of stocks and only a small allocation to bonds.

    As time goes on, the glidepath automatically reduces the stock mix and adds in more conservative investments designed to preserve hard earned savings.

    As it gets closer to the fund’s target date, the glidepath arrives at an investment mix that’s designed to support the next part of the retirement journey.

Why consider target date funds?

Target date funds make it easy for people looking to save for retirement to potentially maximize their future retirement income. If you have a 401(k) plan, you may already be invested in a target date fund, since many plans use them as their “default investment.” Depending on your retirement goals, there are several investment strategies you can consider when getting actively involved in selecting a target date fund.

What’s the best asset allocation for target date funds?

When considering the best target date funds for you, it’s important to note that different funds are designed with unique investment strategies in mind, and that can lead to different desired outcomes. Traditional target date funds typically follow set asset allocations or might be constructed to seek outperformance of certain benchmarks (like the S&P Target Date Indices, for example). These types of funds tend to be on the more conservative side and contribute to a balanced portfolio. On the other hand, goals-based target date funds aim to achieve specific outcomes and may be more likely to be associated with growth and income generation.

In practice, a goals-based investment strategy means the investor customizes the plan — such as managing risk, broadening the scope of investments or considering alternative investments — to help increase their chances of reaching their retirement goal. While the consistent goal of all retirement plans is to achieve a sustainable retirement income, investment needs can change, and a portfolio may need to change accordingly.

  • Growth portfolios aim to increase the value of retirement savings by favoring stocks.
  • Balanced portfolios typically focus on seeking moderate levels of return and risk by investing in a fairly even split between stocks and bonds.
  • Income portfolios are designed to offer long-term sustainability through a generally conservative strategy of bonds, mortgage-backed securities, stocks and other investments that pay interest or dividends.

Are target date funds a good investment?

Target date funds are one tool to have in your arsenal to help minimize retirement risks as much as possible. Even with good habits in place, saving for retirement can be stressful and there are some risks that are beyond your control. What risk saving measures can you take with target date funds? Diversification and managing inflation.

What is diversification?

Diversification is an investment strategy that accounts for market turbulence, so if one kind of investment (let’s say stocks, for example) has a bad year, other types of investments (like bonds, in this case) might have an up year.

Longer life expectancies mean more time to invest, which, in turn, means more exposure to potential market downturns. Target date funds can help address the risk of market turbulence by providing diversification. Said differently, diversification is just another word for “Don’t put all your eggs in one basket.” Simple enough. But it’s important to pay attention to your asset allocations so you can respond when market uncertainties may strike.

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    You've probably heard the expression "Don't put all your eggs in one basket?"

    The problem is that it only tells half the story.

    You may not only need more than one basket, you may also need more than one kind of egg – at least when it comes to your investments.

    Think of it this way: in the long run, stocks may be a good investment, but the stock market has up years and down years. So do cash and bonds.

    Very often, when one kind of investment has a down year, another may have an up year.

    By putting together a mix of cash, bonds and stocks – and even different kinds of stocks from across the globe –ups and downs may be less extreme, and that helps create a less volatile experience.

    The good news is, target date funds manage this mix automatically.

    Target date funds use diversification in two ways. First, they consist of a mix of investments, and can include international exposure.

    Then they change that mix as retirement gets closer, investing heavily in stocks in the early years but getting more conservative as time goes on.

    That way no matter where you are on the path to retirement, target date funds can provide an age appropriate diversified portfolio designed to help grow retirement savings.

How do target date funds manage inflation?

Target date funds can help manage inflation risk in two ways. First, by investing more heavily in equities earlier in your career, the idea is to grow your savings past the point of inflation. In addition, some TDFs invest in what are called “real assets” (such as Treasury Inflation-Protected Securities [TIPS] and real estate), which traditionally have helped hedge against inflation.

Let’s try out some real-life context. Let’s say you have $500,000 in savings set aside for retirement. How do you know if that’s enough? Part of the answer has to do with how much that money will be worth when you actually retire. Inflation risk refers to the concern that your money will be worth less in the future, and you might not have enough to meet your retirement goals. Learn how target date funds are designed to help keep inflation from chipping away at hard earned savings.

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    Here's a simple way to think about inflation.

    Inflation means that one dollar today will buy less in the future than it does now.

    That's a big concern when saving for retirement.

    The good news is that target date funds are designed to help keep inflation from chipping away at hard earned savings.

    And they do it automatically.

    Early on, when you are just starting to put dollars aside for retirement, the fund invests in a diversified mix of stocks to help the portfolio seek faster growth than inflation.

    Then as retirement gets closer, the fund starts to get more conservative and will automatically reduce the percentage of stocks in the portfolio and increase the percentage of bonds.

    The result is a portfolio that’s designed to help grow and preserve a nest egg over a long retirement.