What Is a Target-Date Fund? Risk Tolerance and Example

What Is a Target-Date Fund?

Target-date funds are structured to maximize the investor's returns by a specific date. Generally, the funds are designed to build gains in the early years by focusing on riskier growth stocks, then they aim to retain those gains by weighting towards safer, more conservative choices as the target date approaches.

Target-date mutual funds are often selected by investors saving towards retirement but are also used by people working towards a future big expense such as a child's college tuition.

Key Takeaways

  • A target-date fund is a class of mutual funds or ETFs that periodically rebalances asset class weights to optimize risk and returns for a predetermined time frame.
  • The asset allocation of a target-date fund is typically designed to gradually shift to a more conservative profile so as to minimize risk when the target date approaches.
  • The appeal of target-date funds is that they offer investors the convenience of putting their investing activities on autopilot in one vehicle.
  • Target-date funds usually mature in 5-year intervals, such as 2035, 2040, and 2045.
  • While relatively more expensive than other types of mutual fund, expense ratios on target-date funds have come down significantly in recent years.

Who Actually Benefits From Target-Date Funds?

How a Target-Date Fund Works

Target date funds use a traditional portfolio management methodology to target asset allocation over the term of the fund to meet the investment return objective. Named by the year in which the investor plans to begin utilizing the assets, target-date funds are considered to be extremely long-term investments. For example, in July 2017, Vanguard launched its Target Retirement 2065 products. Given that the funds have a targeted utilization date of 2065 that gives them a time horizon of 48 years.

A fund's portfolio managers use this predetermined time horizon to fashion their investment strategy, generally based on traditional asset allocation models. The fund managers also use the target date to determine the degree of risk the fund is willing to undertake. Target-date portfolio managers typically readjust portfolio risk levels annually.

Special Considerations

Following the initial launch, a target-date fund has a high tolerance for risk and therefore is more heavily weighted toward high-performing but speculative assets. At the annual adjustment, portfolio managers will reset the allocation of investment categories.

A target-date fund’s portfolio mix of assets and degree of risk become more conservative as it approaches its objective target date. 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—that is, the shift of assets—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 (To funds) 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. Some target-date funds, known as “through” funds, will also manage funds to a specified asset allocation past the target date. This is in contrast to other target-date funds, known as "to funds," which will cease any modifications to asset allocation once the target date is reached.

Today, target-date funds are only offered as mutual funds. There are no equivalent ETFs listed at the moment.

Advantages and Disadvantages of Target-Date Funds


Target-date funds are popular with 401(k) plan investors. Instead of having to choose several investments to create a portfolio that will help them reach their retirement goals, investors choose a single target-date fund to match their time horizon. For example, a younger worker hoping to retire in 2065 would choose a target-date 2065 fund, while an older worker hoping to retire in 2025 would choose a target-date 2025 fund.

These funds mitigate the need for other assets. Some financial professionals advise that if you invest in one, it should be the only investment in your plan. This one-and-done approach is because additional investments could skew your overall portfolio allocation. However, after you've picked a fund, you have the ultimate set-it-and-forget-it investment.


Of course, the autopilot nature of target-date funds can cut both ways. The predetermined shifting of the portfolio assets may not suit an individual's changing goals and needs. People grow and change, and so do their needs.

What if you have to retire substantially earlier than the target date—or decide you want to keep working longer? Also, there is no guarantee that the fund's earnings will keep up with inflation. In fact, there are no guarantees that the fund will generate a certain amount of income or gains at all. A target-date fund is an investment, not an annuity. As with all investments, these funds are subject to risk and underperformance.

Furthermore, as investments go, target-date funds can be expensive. They are technically a fund of funds (FoF)—a fund that invests in other mutual funds or exchange-traded funds—which means you have to pay the expense ratios of those underlying assets, as well as the fees of the target-date fund.

Of course, an increasing number of funds are no-load, and overall, fee rates 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?

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. Yes, all 2045 target-date funds will be heavily weighted toward equities, but some might opt for domestic stocks, while others look to international stocks. 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.

  • The ultimate autopilot way to invest

  • All-in-one vehicle—no need for other assets

  • A diversified portfolio

  • Higher expenses than other passive investments

  • Income not guaranteed

  • Possibly insufficient inflation hedge

  • Little room for changing investor goals, needs

Example of Target-Date Funds

Vanguard is one investment manager offering a comprehensive series 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 0.15%. As of Q2 2022, the portfolio allocation was 90.5% in stocks and 9.5% in bonds. It holds other Vanguard mutual funds to achieve its goals. It had 53.8% invested in the Vanguard Total Stock Market Index, 36.6% invested in the Vanguard Total International Stock Index Fund, 6.7% invested in the Vanguard Total Bond Market II Index Fund, and 2.9% invested in the Vanguard Total International Bond Index Fund.

The Vanguard Target Retirement 2025 Fund (VTTVX) has an expense ratio of 0.08%. Because it matures 20 years in advance of the 2065 fund, it is more conservative. As of Q2 2022, its portfolio is weighted 57.5% in stocks and 42.5% in bonds. It has allocated 34.7% of assets to the Vanguard Total Stock Market Index Fund, 27.6% to the Vanguard Total Bond Market II Index Fund, 22.7% to the Vanguard Total International Stock Index Fund, 12.2% to the Vanguard Total International Bond Index Fund, and 2.80% to the Vanguard Short-Term Inflation-Protected Securities Index Fund.

Both funds invest in 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.

In the years beyond the target date, both Vanguard target-date funds will preserve an asset allocation mix of approximately 20% in U.S. equities, 10% in international equities, 40% in U.S. bonds, 10% in international bonds, and about 20% in short-term TIPS.

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

Yes. However, it may behave differently depending on the type of target-date fund you have. A "through fund" will continue adjusting its asset allocation toward more conservative holdings as time passes; a "to-fund" will retain its final asset allocation as of its maturation date indefinitely.

Are Target-Date Funds Expensive?

In general, a target-date fund will have somewhat higher expense ratios compared to a standard mutual fund. This is because the target-date fund, even if it is an index target-date fund, is essentially a fund-of-funds that invests in other mutual funds. Moreover, the fund has to rebalance its portfolio regularly to match the glide path so it is more active than a standard index fund. That said, many target-date index funds 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 access to target-date funds. However, for these to work properly be careful to only use a target-date fund for nearly all of your allocations. This is because if you allocate money to other investments it may defeat the purpose of the glide path provided in the target-date fund.

What Target-Date Fund Should I Pick If I Plan to Retire in a Year Not Ending in -5 or -0?

Most target-date funds are established in 5-year intervals (e.g., maturing in 2030, 2035, 2040, 2045, and so on). There is no set rule if you plan to retire in say, 2033. You can round up to the 2035 fund, or if you have a lower risk tolerance, use the nearer-term 2030 one. You can also choose to put something like 60% of your allocation in 2035 fund and 40% in the 2030 fund.

Article Sources
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  1. ETF Database. "Target Retirement Date ETF List."

  2. Vanguard. "Vanguard Target Retirement 2065 Fund (VLXVX)."

  3. Vanguard. "Vanguard Target Retirement 2025 Fund (VTTVX)."

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