What is a target date fund?

A target date fund is a special type of mutual fund designed for investors who plan to retire close to a certain year. They gradually shift their asset allocation over time away from riskier assets like stocks into more conservative and income-producing assets like bonds.

Is a target date fund a good idea?

A target date fund could be a good choice for investors who prefer a hands-off approach. It automates the portfolio rebalancing process, so you don't have to do this manually. However, some target date funds charge high fees so experienced investors may prefer to avoid them.

What is the average return on target date funds?

The average return on target date funds will vary depending on several factors, including economic conditions at the time, where it is in its glide path, and its underlying investments. Generally, target date funds offer higher returns earlier in the glide path because more of your money is invested in riskier assets with the potential for higher yields, like stocks. As you near retirement, your risk tolerance declines, and target date funds adjust by moving more of your money into safer investments, like bonds. This reduces your risk of loss but also reduces the returns you earn in later years.

What is a good fee for a target date fund?

Generally, you want to pay no more than 1% of your assets each year in fees. Some target date index funds offer fees as low as 0.1%, so this might be a good option for the fee-conscious investor. You can learn more about your target date fund's fees by checking your prospectus.

Target Date Funds: What They Are and How They Work

Target date funds are a simple option for retirement investing but can come with high fees.

Key Points

Target date funds automate portfolio rebalancing over time, shifting from riskier to safer assets.
Investors who prefer a hands-off investment approach may find target date funds appealing.
Fees for target date funds vary, with some as low as 0.1% or less for index-based options.

A target date fund is a type of mutual fund structured to make it easier for investors to maintain a desirable asset allocation over time.

While young investors should allocate the most money to higher-risk assets like stocks, investors nearing retirement are advised to structure their portfolios more conservatively. Most investors rebalance their portfolios manually, but owning shares in a target date fund automates the rebalancing process.

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Hand drawing a bar graph labeled Retirement Plan. — Image source: Getty Images.

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glide path example 1 for target date fund — Image source: Securities and Exchange Commission.

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glide path example 2 for target date fund — Image source: Securities and Exchange Commission.

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Pros

Cons

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Compound Interest

Compound interest is what you get when you reinvest your earnings, which then also earn interest.

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Target date fund FAQs

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

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Matt Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.