Target Date Funds: What They Are and When to Use Them

These financial tools automatically rebalance as you near retirement.

A target date fund is an investment instrument designed to become more conservative as it approaches a predetermined future date. For investors looking to simplify their retirement strategies, target date funds can be appealing for their “set-it-and-forget-it” nature.

But how do they work and are they the right tool for your retirement planning needs?

How A Target Date Fund Works

A target date fund is a fund that can hold a diversified basket of mutual funds and ETFs. The fund’s assets allocation automatically shifts over time until it reaches a preset target date, such as your expected retirement date.

Target date funds have a risk profile that changes over time. Typically, a target date fund will accept more risk—in exchange for higher potential return—early on. As the fund nears its target date, it will shift its assets to favor stability—mitigating the risk that the fund will lose value just when you’re ready to cash out.

In most cases, target date funds mature in years ending in 5 or 0. Retirement planning investors usually select a fund that matures close to their expected retirement date. A young person just starting their career might choose a fund that matures in 2065 or 2070. Someone preparing to retire in 10 years might opt for a 2030 or 2035 maturity date. If you wanted to dial in your risk tolerance, you could even buy into two funds with different target dates. For example, if you were retiring in 2057, you could buy into a 2055 target date fund and a 2060 target date fund.

Understanding The Glide Path

A glide path is a formula that determines how assets within a fund will be allocated over the life of the target date fund. Glide paths are divided into two categories: “to” and “through.” For a fund with a “to” glide path, the fund’s asset allocation adjusts until the retirement date arrives, after which the mix of assets held in the fund remains fixed. A “through” glide path, on the other hand, will continue to adjust its holdings through your retirement date and afterward.

Depending on the specific fund, the glide path may be steep, or it may be more gradual. A gradual glide path might begin decreasing investment in riskier equities by 1% per year after the investor turns 50 and reallocating those funds into a more secure asset class, such as bonds, until the target date arrives. A steeper glide path strategy might increase the percentage of change over a shorter period. Your financial advisor can help you choose a target date fund with a glide path best suited to your financial goals and risk tolerance.

Using Target Date Funds Beyond Retirement Planning

While it is common for target date funds to be earmarked for retirement, they can be used to achieve other financial goals as well.

For instance, you may wish to set up a target date fund to save for your child’s college expenses by investing in a fund that will mature as they approach graduation day.

Many investors use target date funds to simplify investment decisions. Choosing a target date fund puts your investment strategy on autopilot—once you set it in motion, the fund will follow its glide path until it matures.

Key Considerations

Historically, target date funds have tended to be more expensive than other investment vehicles because the investor is responsible for both the fees of the fund and its underlying funds. While such fees have decreased in recent years, it’s important to understand a target date fund’s expense ratio and how it compares to other options before choosing it.

However, the convenience of target date funds makes them quite popular. Investors who seek more variety, on the other hand, may prefer to diversify their retirement investments to include other funds with differing amounts of risk and return.

Whether you’re saving for your retirement, college, or another long-term financial goal, consult your financial advisor to help determine whether a target date fund fits into your investment plan.


Securities offered through Calton & Associates, Inc. Member FINRA/SIPC. Advisory services offered through of Waterloo Capital LP d/b/a AMG Wealth Advisors, an SEC-registered investment advisor. Calton and Waterloo Capital, LP are separate unrelated entities. For more information about Waterloo, or to receive a copy of our disclosure Form ADV, Form CRS and Privacy Policy call 800.266.1723 or visit adviserinfo.sec.gov/Firm/133705.

Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities or to advise on the use or suitability of The AMG Managed Portfolio Series, or any of the underlying securities in isolation. Information specific to the underlying securities making up the portfolios can be found in the Funds’ prospectuses. Please carefully read the prospectus before making an investment decision.

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this article should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy.

Investing involves risk. Principal loss is possible. Investing in ETFs is subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of the shares may trade at a discount to its net asset value(“NAV), an active secondary market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact a fund’s ability to sell its shares. Shares of any ETF are bought and sold at Market Price (not NAV) and are not individually redeemed from the fund. Brokerage commissions will reduce returns. Market returns are based on the midpoint of the bid/ask spread at 4:00pm Eastern Time (when NAV is normally determined for most ETFs), and do not represent the returns you would receive if you traded shares at other times. Diversification is not a guarantee of performance and may not protect against loss of investment principal.