What is a Target Date Fund?

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 over time. Simply put, a TDF is a kind of fund that helps take the guesswork out of saving for retirement.

Understanding Target Date Funds

From the start of your career until well into your retirement years, target date funds are designed to make retirement investing easier. Watch to learn more.

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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 they work?

A portfolio manager for a TDF uses what’s called a “glidepath” to adjust the underlying mix of investments that make up your target date fund.

For example, a 22 year old teacher today, planning to retire at age 66, might invest in a target date 2060 fund. Over time, a portfolio manager will rebalance the fund so that it becomes more conservative, with fewer equities and more fixed income, as the teacher moves closer to the target date (2060). It’s important to know that the principal value is not guaranteed at any time, including at the target date.

What is a glidepath?

Think of a glidepath as an investment roadmap. It helps determine what your risk exposure in your target date fund should be over the course of your career.

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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.


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” (what your company enrolls you in if you don’t actively select your investment strategy).

There’s a reason many retirement plans choose target date funds as their default investment: They make it easy for people looking to save for retirement to potentially maximize their future retirement income.

But, when considering whether to invest in a target date fund, it’s important to note that different funds are designed with different investment philosophies in mind. And that can lead to different results.

For example, a traditional target date fund might follow a set asset allocation or it might be designed to outperform a certain benchmark (like the S&P Target Date Indices, for example).

A goals-based target date fund, on the other hand, takes a different approach. As the name suggests, these types of funds aim to achieve specific outcomes. Maybe you want to minimize volatility. Perhaps you want to strive to have consistent income in retirement. With goals-based target date funds, the funds are built differently to help you reach your specific goal. In practice, this means customizing the investment strategy – by managing risk, broadening the scope of investments, etc. – to help increase your chances of reaching your goal.


Potential advantages

Even with good habits in place, saving for retirement can be stressful and there are some risks that are beyond your control. Still, TDFs are one tool to have in your arsenal to help minimize these risks as much as possible.

What is diversification?

The risk: Market turbulence

The target date fund difference: Diversification

Longer life expectancies mean more time to invest, which, in turn, means more exposure to potential market downturns. Target date funds can help address this risk by providing something called diversification. What’s diversification? It’s just another word for “don’t put your eggs in one basket.” Simple enough. But here’s how it makes a difference when it comes to saving for retirement: Typically, if one kind of investment (let’s say stocks, for example) have a bad year, other types of investments (like bonds, in this case) might have an up year.

How does diversification work?

Learn how target date funds can provide a well-diversified investment solution across different types of assets.

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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.

Managing inflation

The risk: Inflation

The target date fund difference: Inflation-sensitive investment portfolios

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. Thus, 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.

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 and real estate) that traditionally have helped to hedge against inflation.

How do Target Date Funds
 manage inflation?

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.