Target Retirement Funds Help You Invest Appropriately By Age

This article discusses how to use target retirement funds in a retirement portfolio. Also called target date retirement funds or lifecycle funds, these are funds used to set your portfolio on auto-pilot.

Age targeted funds or target date funds are a type of mutual fund or investment fund that were introduced in the last 15-20 years by some of the major financial institutions. This type of investment fund may also be described as an age-based fund.

They are intended to make investment decisions easier by allocating the recommended percentages of a portfolio between equities, bonds, and fixed income funds according to the number of years away from the target date.

Within these target retirement funds, there are individual funds.

For example, the equity portion of the fund may have Large Cap Value fund, an Index fund, a Small Cap Growth fund, and so on.

As the target date gets closer, the percentages for equities goes down and bonds and fixed income go up. This has the effect of reducing risk from aggressive or high risk to conservative or low risk investing.

Examples and Illustrations

Here are examples of target date funds with various target dates to illustrate the basic difference.

These examples were taken from Fidelity's Freedom Fund offerings.

Fund 2040 would have a target date in the year 2040 which could correspond with retirement.

Fund 2040: Equities 61%, International equities 21%, Bonds 18%

Fund 2025: Equities 51%, International equities 17%, Bonds 32%

Fund 2015: Equities 38%, International 12%, Bonds 40%, Short-term/Money Market 10%

Image source:

Target Date Freedom Funds from Fidelity

This graphic example (below), from TIAA-CREF's Lifecycle Fund offerings, shows how the lifecycle fund changes over time for someone aged 25 with a target date of 2050.

You can see here that the equity portion is over 90% at the beginning, but gradually goes down to below 50% as retirement gets closer, and cash investments are added.

Image source:

target retirement funds for 2050 from tiaa-cref

It is important to note that you don't have to choose a fund based on your actual age or your actual retirement year. If your risk tolerance is more or less than the typical recommendation, you can simply choose the fund that more closely fits your current preferences. Then, when it is time to do a periodic review of your investments, you can check to see if the fund's positions still match your preferences or if you need to move into other funds.

If you like the convenience of a fund group, but something you like is missing, simply add another fund that addresses that investment type.

For example, a real estate fund, or a fund that has served you well in the past that you want to keep in your portfolio.