# Target-Date Funds Explained: Risk Management and Real-Life Examples

## What Is a Target-Date Fund (TDF)?

Target-date funds (TDFs) offer a strategic way to manage investments as you approach retirement. These funds start with riskier investments for growth potential and gradually shift to more conservative options. They provide an automated, age-appropriate asset allocation that helps ease the investment process for individuals planning for retirement or other long-term goals.

[Target-date mutual funds](https://www.investopedia.com/target-date-funds-vs-lifecycle-funds-5409267) are offered by many company 401(k) plans. TDFs also are an option for people investing in individual retirement accounts (IRAs).

### Key Takeaways

*   A target-date fund (TDF) automatically adjusts its asset allocation over time, becoming more conservative as the target date approaches.  
    
*   TDFs are popular in retirement accounts like 401(k)s and IRAs, providing a set-and-forget investment strategy with age-appropriate asset allocation.  
    
*   TDFs incur higher fees compared to standard mutual funds due to their "fund of funds" structure, which includes an additional layer of management fees.  
    
*   Investors should review the specific asset composition and fee structure of TDFs to ensure it aligns with their risk tolerance and financial goals.

![Target-Date Fund (TDF): A long-term investment account that's adjusted over time to reduce risk as the investor approaches a specific goal such as retirement.](https://www.investopedia.com/thmb/vUEW6m8DTd5evmNtjz0DY6QOKnU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/target-date_fund.asp-FINAL-1-1-78e57fdd21d64065b8aec1970d6df171.png)

*— Investopedia / Joules Garcia*

## Understanding the Mechanics of Target-Date Funds

Target date funds use a traditional portfolio management method to revise asset allocation over the term of the fund to meet the investor's objective.

Portfolio managers use the set time frame to plan investments based on a long-term strategy. This strategy relies on riskier stocks in the early years, moving gradually toward fixed-income investments like bonds in later years.

The fund managers use the target date to determine the degree of risk currently appropriate for the investor. Target-date portfolio managers typically readjust portfolio risk levels annually.

These increasingly popular funds generally include the target date in the fund name. For example, the Vanguard Target Retirement 2070 Fund (VSVNX) is designed to reach the investor's objective in 2070.

## Managing Risk Tolerance in Target-Date Funds

When first launched, a target-date fund accepts high risk and invests more in speculative, high-growth assets. At the annual adjustment, portfolio managers will reset the allocation of investment categories.

The asset mix and risk level of a target-date fund become more conservative as the target date gets closer. Higher-risk portfolio investments typically include domestic and global equities. Lower-risk portions of a target-date portfolio typically include fixed-income investments such as bonds and cash equivalents.

Most fund marketing materials show the allocation [glide path](https://www.investopedia.com/terms/g/glide-path.asp)—that is, the shift in asset allocation—across the entire investment time horizon. The funds structure their glide rate to achieve the most conservative allocation right at the specified target date.

Some target-date funds, known as [“through” funds](https://www.investopedia.com/terms/t/through-fund.asp), will also manage funds to a specified asset allocation past the target date. In the years beyond the target date, allocations are more heavily weighted toward low-risk, fixed-income investments.

Other target-date funds, known as "to funds," cease any modifications to asset allocation once the target date is reached.

> **Fast Fact**
>
> Most TDFs are mutual funds, but there are target-date ETFs and target-date mutual funds that charge low fees.

## Pros and Cons of Investing in Target-Date Funds

### Advantages

Target-date funds are favored by [401(k)](https://www.investopedia.com/terms/1/401kplan.asp) investors who don't want to annually check or adjust their investments. TDFs allow investors to put the work on autopilot. A younger worker hoping to retire in 2065 would choose a target-date 2065 fund, while an older worker hoping to retire in 2030 would choose a target-date 2030 fund.

For some, TDFs eliminate the need to add another retirement savings vehicle as a backup to a 401(k). Some financial professionals advise that if you invest in only one long-term savings plan, it should be a TDF.

### Disadvantages

The autopilot nature of target-date funds [can cut both ways](https://www.investopedia.com/articles/retirement/07/life_cycle.asp). The predetermined shifting of the portfolio assets may not suit an individual's changing goals and needs.

What if you have to retire substantially earlier than the target date, or decide you want to keep working longer?

In fact, there are no guarantees that the fund will generate a certain amount of income or gains. A target-date fund is an investment, not an annuity. As with all investments, these funds are subject to risk and underperformance.

Pros

*   Long-term investing on autopilot
    
*   Geared towards sensible retirement planning
    
*   A diversified portfolio
    

Cons

*   Higher expenses than other passive investments
    
*   Results not guaranteed
    
*   Little room for changing investor goals and needs
    

## Important Considerations When Investing in TDFs

### Check the Fees

Target-date funds can be expensive. A TDF is a [fund of funds](https://www.investopedia.com/terms/f/fundsoffunds.asp) (FoF), meaning it is a mutual fund that invests in other mutual funds or exchange-traded funds. That means you have to pay the expense ratios of those underlying assets as well as the fees of the target-date fund.

An increasing number of TDFs are no-load funds and, overall, fees have been decreasing. Still, it is something to watch out for, especially if your fund invests in a lot of passively managed vehicles. Why pay double fees on index funds when you could buy and hold them on your own?

### Compare Funds

Also, it's worth bearing in mind that similarly named target-date funds are not the same—or, more specifically, their assets are not the same.

While all 2045 target-date funds focus on stocks, some choose domestic stocks, while others prefer international ones. Some might go for investment-grade bonds and others choose high-yield, lower-grade debt instruments.

Make sure the fund's portfolio of assets fits your comfort level and own appetite for risk.

## Examples of Target-Date Funds

Vanguard is one of the investment companies [offering a comprehensive series](https://www.investopedia.com/articles/investing/112315/best-3-vanguard-mutual-funds-retirement.asp) of target-date funds. Below we compare the characteristics of the Vanguard 2065 (VLXVX) fund to the characteristics of the Vanguard 2025 fund (VTTVX).

The Vanguard Target Retirement 2065 Fund (VLXVX) has an expense ratio of 0.08%. As of May 31, 2024, the portfolio allocation was 89.49% in stocks, 9.61% in bonds, and 0.90% in short-term reserves. It holds other [Vanguard mutual funds](https://www.investopedia.com/how-vanguard-patented-a-system-to-avoid-taxes-in-mutual-funds-4686985) to achieve its goals.

It had 54% invested in the Vanguard Total Stock Market Index Fund, 36.30% invested in the Vanguard Total International Stock Index Fund, 6.70% invested in the Vanguard Total Bond Market II Index Fund, and 3% invested in the Vanguard Total International Bond II Index Fund.

> **Important**
>
> Expense ratios eat away at returns. Passively managed funds have lower expense ratios than actively managed ones. When choosing funds, try to align your return goals with your risk tolerance and expenses.

The Vanguard Target Retirement 2025 Fund (VTTVX) has an expense ratio of 0.08%. Because it matures much sooner than the 2065 fund, it is more conservative. As of May 31, 2024, its portfolio is weighted 52.02% in stocks, 47.08% in bonds, and 0.90% in short-term reserves.

It has allocated 31.50% of assets to the Vanguard Total Stock Market Index Fund, 28.80% to the Vanguard Total Bond Market II Index Fund, 21.10% to the Vanguard Total International Stock Index Fund, 12.40% to the Vanguard Total International Bond II Index Fund, and 6.20% to the Vanguard Short-Term Inflation-Protected Securities Index Fund.

Both funds invest in almost all the same assets; however, the 2065 Fund is more heavily weighted toward stocks, with a relatively smaller percentage of bonds and cash equivalents. The 2025 Fund has greater weight in fixed income and fewer stocks, so it is less volatile and more likely to contain the assets the investor needs to begin making withdrawals in 2025.

## Can I Hold Onto a Target-Date Fund After the Target Date?

Yes, you can keep a target-date fund after its target date. The fund will be one of two types:

*   If it is a "through fund," your asset allocation will continue to be adjusted toward more conservative holdings as time passes.
*   If it is a "[to-fund](https://www.investopedia.com/to-fund-definition-4684020)," the asset allocation as of the target date will remain in place indefinitely.

## Are Target-Date Funds Expensive?

In general, a target-date fund may have a higher expense ratio than a standard mutual fund. This is because the target-date fund is a fund of funds that invests in other mutual funds, adding a double layer of fees paid by the investor.

Moreover, since the fund rebalances regularly, it is [more active than a standard index fund](https://www.investopedia.com/retirement/targetdate-fund-best-choice/).

That said, many [target-date index funds](https://www.investopedia.com/articles/financial-advisors/073015/targetdate-vs-index-funds-one-better.asp) available today have low expense ratios of 0.10% or lower.

## Can I Use a Target-Date Fund in My 401(k) or Individual Retirement Account?

Yes. Most plan providers today offer a target-date fund among their choices.

Consider using only a target-date fund rather than spreading your money among several choices. Allocating money to other investments may defeat the purpose of a target-date fund.

## What TDF Should I Pick If I Plan to Retire in a Year Not Ending in a "5" or a "10"?

Most target-date funds are established in 5-year intervals (for example, maturing in 2030, 2035, or 2040). There is no set rule if you plan to retire in, say, 2033. You can round up to the 2035 fund, or if you prefer a slightly lower risk level, use the nearer-term 2030 one.

You can also choose to divide your allocation between the funds with the earlier and the later target dates.

## The Bottom Line

Target-date funds offer a hands-off approach to retirement planning by automatically adjusting from aggressive, growth-oriented investments to more conservative options as the target retirement date nears. This makes them suitable for investors who prefer not to actively manage their portfolios.

However, these funds can incur higher fees due to their 'fund of funds' structure and expense ratios of underlying assets. Additionally, TDFs vary in strategy and asset allocation across providers, so it is crucial for investors to review the prospectus and ensure alignment with their risk tolerance and financial goals before investing.

> **Article Sources**
>
> 1.  Vanguard. "[Vanguard Target Retirement 2070 Fund](https://investor.vanguard.com/investment-products/mutual-funds/profile/vsvnx)."
>     
> 2.  Vanguard. "[Vanguard Target Retirement 2065 Fund (VLXVX)](https://investor.vanguard.com/mutual-funds/profile/VLXVX)."
>     
> 3.  Vanguard. "[Vanguard Target Retirement 2025 Fund (VTTVX)](https://investor.vanguard.com/mutual-funds/profile/VTTVX)."