What the fund does
A target-date fund is a single fund holding a mix of stock and bond funds, named for a year near your expected retirement, such as 2060. It rebalances itself and follows a glide path, shifting gradually from stocks toward bonds as the year approaches. A typical fund holds around ninety percent stocks for a thirty-year-old and something near half stocks at the retirement date. Glide paths differ between providers, so two funds with the same year on the label can carry noticeably different risk. The fund's fact sheet shows the path in one chart.
Why the mix matters
Stocks have historically returned more than bonds over long periods, and they have also lost a third to a half of their value in bad stretches, more than once in a working lifetime. Bonds cushion the falls and drag on the growth. At twenty-five, with forty years before withdrawals, a crash is a sale on shares you are still buying. At sixty, the same crash takes a slice out of money you need soon. The right mix is the most aggressive one you will hold through a fifty percent drop without selling, and that last clause is where people overrate themselves.
Fees first
The expense ratio is the annual percentage the fund keeps. Target-date funds built from index funds commonly charge under 0.20 percent, while actively managed versions can charge 0.60 percent or more. On a $500,000 balance, the difference between 0.10 and 0.75 percent is $3,250 every year, taken whether markets rise or fall. If your 401(k) offers only an expensive target-date series, you can assemble much the same thing from the plan's cheapest broad stock index fund and bond index fund. An old rule of thumb puts 110 minus your age in stocks, which gives eighty percent at thirty. It is a starting point and not a law. Rebalance a homemade mix once a year and no more often.
Common mistakes
- Splitting money between a target-date fund and several other funds defeats the design, because the fund is meant to be the whole portfolio.
- Owning several target years at once adds nothing but confusion.
- Moving to cash after a fall locks in the loss and usually misses the recovery.
- Judging each account separately misleads you, because the mix that counts is the one across the whole household.
Note Many workplace plans enroll new employees in a target-date fund automatically, often at a low contribution rate. The fund may suit you, but make sure the rate is one you chose.
