The road to financial ruin, like a certain other infamous byway, seems paved with good intentions. Target-date funds are a powerful tool to help us save for retirement -- but too many of us are making bad moves that keep these funds from doing their job.

Stay on target, stay on target …
Each target-date fund assumes that its shareholders will retire around a certain year. The fund's managers therefore shift their asset allocation over time, becoming more conservative and adding more bonds as retirement draws closer. It's a great idea, saving us from the chore of regularly rebalancing our assets.

As an example, here's a recent breakdown of the Vanguard Target Retirement 2025 (VTTVX) fund:


Percentage of Target-Date Fund Assets in This Fund

10-Year Annualized Return

Holdings Include

Total Stock Market (VTSMX)




Total Bond Market (VTBIX)



Treasury, agency, and corporate bonds

European Stock (VEURX)



BP (NYSE:BP), Vodafone (NYSE:VOD)

Pacific Stock (VPACX)



Honda Motor (NYSE:HMC), Sony

Emerging Markets (VEIEX)



China Mobile (NYSE:CHL), Petroleo Brasileiro (NYSE:PBR)

Source: Morningstar.

Boffo blunders
Unfortunately, many investors are preventing promising funds like these from doing their jobs. According to a recent report from J. P. Morgan Asset Management, which oversees more than 350 defined contribution retirement plans with 1.7 million participants, many workers are not saving enough, and are taking costly loans out on their accounts. To be specific:

  • On average, participants begin contributing about 6% of their salary to their accounts, upping it too slowly. By age 40, they're chipping in 8%, not reaching 10% until age 55. Most of us need more than we think we need for retirement -- we should be socking away at least 10% of our income, and the earlier we start, the better. By starting small, we're shortchanging our future, because those early dollars have the most time to grow. The money we contribute in our 20s can grow for 40 years -- why minimize it? Furthermore, target-date funds have you invested most aggressively in your younger years. Skimp on contributions, and you're giving them much less to work with.
  • Roughly 17% of participants take out loans against their savings, averaging about 25% of their plan balances. Any money removed is no longer working for you, and has no chance of growing.
  • Conventional wisdom -- as well as our own Rule Your Retirement newsletter -- suggests withdrawing about 4% from our nest egg each year in retirement, increasing that by the inflation rate. But on average, participants are taking out more than 20% annually, and emptying their accounts within a few years. These funds are designed to keep adjusting as you age, but if you remove your money, they can't do much.

The solution
Fortunately, you don't have to join the ranks of these ill-informed workers. It's not too late to salvage your retirement. Take some time to figure out how much money you'll need in retirement, and how you plan to get there. You'll probably want to sock away at least 10%, if not 15%, of your salary, using both your 401(k) and a Roth IRA. Don't cash out your retirement account once you leave your job; you can roll it over into an IRA instead. And don't borrow against it unless you don't have any better option.

Finally, be sure to invest effectively in your accounts. What's the point of socking away lots of money if you're doing so too conservatively, or too aggressively? Read about some asset allocation models recommended by my colleague Robert Brokamp in our Rule Your Retirement newsletter. You can try it free for 30 days.

Do you use target-date funds? What do you think of them? Leave a comment below and let us know!

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Petroleo Brasileiro is a Motley Fool Income Investor recommendation. The Fool owns shares of China Mobile. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.