Target date mutual funds – also known as age-based funds or life-cycle funds – are low maintenance, retirement plan products that operate under as asset allocation formula, which adjusts itself as it gets closer to the year you will retire.

You may be familiar with the concept if your employer pension plan participates in one of these funds.

Choosing a fund

Target date mutual funds are designed to be the only investment vehicle that an investor uses to save for retirement so the asset allocation isn’t skewed by other investments.

The target year is identified in the name of the fund, e.g. Fidelity ClearPath 2045.

When choosing a fund, check the asset mix, which can be dramatically different between funds. You can find funds made up entirely of index funds or funds that are actively managed.

Understand the glide path, or how the asset allocation changes as you age.

Ones that drastically increase their fixed income and cash position a few years before retirement are suitable for retirees who plan to liquidate the funds to purchase an annuity.

Other funds maintain a bigger equity stake to continue to invest for growth.

Related: Protecting your nest egg in retirement

Expenses must also be considered when choosing these funds. Look for low fees.

Here are two examples for an investor who wants to retire in 30 years:

1. Vanguard Target Retirement Fund 2045

  • Holds 4 Vanguard index funds: approximately 90% equities and 10% bonds.
  • 1-year return = 3.29%, 3-year return = 13.8%
  • Average expense ratio 0.17%

2. BlackRock LifePath 2045

  • Actively managed (10 funds).
  • 1-year return = 1.25%, 3-year return = 10.94%
  • Average expense ratio 1.26%

Disadvantages

Target-date funds may make saving easy, but they can leave your investment a little light if fees erode your returns, or the glide path is too conservative too early on.

There are hundreds of existing funds available, each with their own fee structure, risk profile and asset mix making it a challenge to compare products and choose the one perfect for you.

Related: How to build your own portfolio of index funds

You also need to contribute the right amount. Regardless of the chosen date, an underfunded nest egg is not going to support your retirement needs as it moves to a more conservative allocation.

Just because the fund says “2045” doesn’t mean that the return is guaranteed. A severe downturn in the market just before your target date can decimate the funds holdings. It’s important to know what investments the fund hold and the underlying risks.

Final Thoughts on target date mutual funds

Investors who are willing to choose their own portfolio assets and rebalance regularly may be able to achieve better returns on their own.

But investors who just want to designate a percentage of their money to retirement, and then forget about it for 30 years or so, may be completely comfortable with target retirement funds.

Related: Retirement planning for late starters

In fact, the popularity of these funds has been predicted to increase in the future.

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10 Comments

  1. Tom on July 22, 2015 at 2:22 am

    I don’t like the sound of these because they seem to adjust their allocation no matter what. ie: if equities are down, it’s going to sell them anyway to buy more fixed income. That doesn’t sit right with me. I’d rather take an approach like so, rather than target date funds:
    When young, get into the Tangerine fund that is entirely equities. As you age, switch between their funds accordingly. This way, if markets are down, you can wait it out in the same fund until they crawl back up, and then switch funds to one of the others to include more fixed income.

    Makes more sense to me. It’s still a passive way to invest, no rebalancing needed (they do it for you) and it’s a simple one-fund solution that you can essentially “target date” yourself, by making a simple call every 10-15 years or whatever.

    That way you don’t “automatically” sell when markets are down, and could avoid the buy high-sell low problem I see could happen with these target date funds.

  2. Grant on July 22, 2015 at 9:15 am

    Tom, I think what you are describing you would do is market timing – “if markets are down wait it out” – what if the market goes down further and then you need the money at retirement? The purpose of target date funds is that they automatically gradually reduce your exposure to equities as you approach retirement to mitigate sequence of return risk – the need for liquidity when the markets are down.

    Marie, I like the idea of retirement date funds as they can take the emotions out of investing and you can automate the savings process. Some authorities take those ideas further and would recommend a compulsory percentage of savings invested in a retirement date fund, then at retirement that money is converted into an annuity.

    The problem in Canada is that the fees for these funds are too high. I don’t think Vanguard index target date funds are available in Canada, are they?

    • Boomer on July 22, 2015 at 4:01 pm

      @Grant: For some reason index fund variations are difficult to find for the individual investor. Vanguard is looking at a distribution system, as is Fidelity, but they are not popular with wealth managers. They are currently available only for group RRSPs and defined contribution plans.

  3. Tom on July 22, 2015 at 11:03 am

    Grant, I don’t think of it of “timing the market”. Perhaps I am wrong?
    Say at age 20 you start saving (using Tangerine funds as examples). You start investing in the Equity Growth fund (100% equities). Then age 30 comes around, you move your funds into the Balanced Growth fund. Then at 40, move your funds to Balanced fun. Then at 50, the Balanced Income fund. Your equity stake is 100% at age 20, 75% at age 30, 60% at age 40, and 30% at age 50. Or something close to that. With the downgrade every 10 years, and ending at age 50, it does give some wiggle room on changing the funds. ie: At age 40, perhaps your portfolio is down quite a bit. You can always keep a passive eye on it and switch it at 42 or 43 even. Some kind of set up like that.

    I just feel this kind of method might be better – as you control when you sell off equities. Of course, Target Date Funds make it easy to have a “set-it-and-forget-it” type of plan, but if someone wanted to take more control over their portfolio, without actually having 2 or 3 or more funds (and needing to rebalance them), this could be a method that has potential.

    Am I still not thinking right? (It’s not the method I personally use, but as I said, I feel it could be almost like a “happy medium” between Target Dates and DIY).

    • Boomer on July 22, 2015 at 4:08 pm

      @Tom: According to a Fidelity spokesman, “They are a long term investment designed to build capital early on….over time they become more conservative….For people who lack the inclination and discipline to rebalance their portfolios themselves.”

      So, yes, there are tons of other options for couch potatoes and investors who want more control.

      In my opinion, they are suitable for company group RRSP and pension plans because most employees use “set-it-and-forget-it” for these more than they do in their personal portfolios.

    • Grant on July 24, 2015 at 5:12 am

      Tom, I see what you mean. You are really talking about having more control over the glidepath rather than market timing in the true sense of the word. If you are concerned about and therefore want to have a more hands on approach, then you might as well just own the funds separately and do your own glidepath. Target date funds are designed for people who don’t want to do that. Always tradeoffs.

  4. Sean Cooper, Financial Journalist on July 24, 2015 at 7:24 pm

    Target date funds seem like the perfect solution for investors who just want to save money and not worry about investing. The higher fees can be worth the re-balancing of the portfolio.

  5. unbalanced on July 25, 2015 at 2:00 pm

    Great topic and lots of feedback. I am retired for close to 6 years . In May 2014 and May 2015 I put 10k each time in Mawer Balanced with a mer of .96. At this time I am more than happy with the results. This week I meet the financial clown I have. The DSC will be done and so will he.

  6. John Ryan on July 26, 2015 at 7:43 am

    I’ve had friends who wanted to improve their investments, but weren’t willing to put much time into learning about it, go for Target Date Funds. As you suggest, I made sure they were looking at options with low fees.

    My general view was that it was pretty good, some room for improvement, but if the ease of management was a priority for them then it seems a reasonable way to god.

  7. Alex on March 1, 2017 at 7:29 am

    Just starting out at a late age of 59 years.
    I don’t mind or rather have to allow a little more risk.
    Suggestions where I could start putting money into and perhaps a option or two if possible.
    Thank you!

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