What Is a Target Date Fund?

A target date fund is an investment fund designed to adjust its level of risk based on an investor's expected retirement date.

For example, someone who expects to retire in 30 years may be comfortable taking on more investment risk than someone who plans to retire in five years. Because of the longer time horizon, younger investors often hold a larger percentage of stocks and a smaller percentage of bonds.

As retirement approaches, many investors choose to gradually reduce risk by increasing their allocation to bonds and other more conservative investments.

A target date fund is designed to make these adjustments automatically.

Most target date funds are named after an approximate retirement year, such as a 2055 Fund or a 2065 Fund. In general, funds with later target dates hold a higher percentage of stocks, while funds with nearer target dates hold a more conservative mix of investments.

Over time, the fund follows a predetermined path that gradually reduces risk as the target date approaches. The fund also handles rebalancing, helping maintain the intended allocation without requiring the investor to make ongoing adjustments.

Some investors appreciate the simplicity of a target date fund and view it as a "set it and forget it" approach to investing. Rather than selecting individual funds and periodically adjusting allocations, they can own a single fund that manages the process for them.

Others prefer a more hands-on approach. By building their own portfolio, investors have greater control over their investment choices, allocations, and level of risk.

Neither approach is necessarily better. It often comes down to personal preference, interest, and how involved someone wants to be in managing their investments.

For investors seeking simplicity, diversification, and automatic adjustments over time, a target date fund may be worth considering.

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