The Best Target Date Mutual Funds

Lifecycle Funds To Help You Reach Retirement on Time

close-up of dart board with dart on target
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Target date mutual funds have become popular retirement savings vehicles, commonly found in 401(k) plans and other employer-sponsored retirement plans. But are these mutual funds right for you and your retirement goals?

Find out how target date funds work and you'll know whether they're smart investment choices for you.

Key Takeaways

  • Target date mutual funds combine many different assets, aimed to reach retirement or savings goals by a set time period.
  • These types of funds are best suited for investors who know when they plan to retire and prefer a simplified, automatized process.
  • Portfolios of target date funds are allocated without much regard for individual preference or risk, but rather by preset standards and formulas.
  • You have many options in target date mutual funds, so be sure to look for low expense ratios, high diversity, and good long-term performance.

What Are Target Date Funds?

Target date funds are often mutual funds that invest in an asset mix of stocks, bonds, and other investments. What makes these funds unique, compared to other balanced funds, is that the asset allocation gradually shifts over time in a way that is appropriate for investors retiring during a certain target year or decade.

  • Alternate name: Lifecycle funds

For example, a target date 2050 fund would invest in a way that is appropriate for someone who expects to retire in about 30 years. Since the target date is so far in the future, the asset allocation could be 80% stocks and 20% bonds. By the year 2050, it might be the opposite—20% stocks and 80% bonds.

Are Target Date Mutual Funds a Good Fit for You?

Investors who may benefit most by investing in target date funds are those looking for:

  • Simplicity. It's normal to be confused about how to transition one's asset allocation over time so that it is ready for retirement as the target date gets closer. Target date funds simplify the investment process so investors don't have to do any research or other investment management. Some investors do not have the desire or the time to learn how to build a portfolio of mutual funds for retirement.
  • Diversification. Target date funds are often composed of a diverse selection of mutual funds, making one diversified portfolio in just one fund.
  • Automated investing. You'll set an appropriate asset allocation for a stated retirement date and, over time, slowly reduce stocks and increase bonds. By doing this, the target date retirement fund does all of the asset allocation and investment selection for you.
  • A one-fund solution. Target date funds can be considered an all-in-one retirement planning solution. The most ideal candidate for target date retirement funds is the investor who has most or all of their retirement savings in one account, such as a 401(k) or IRA.

Target Date Funds Are Not for Everyone

Although target date funds have many benefits, they are not the ideal choice for all investors. For example, an asset allocation of 80% stocks and 20% bonds might be appropriate for someone who will be retiring in 30 years, but it might not be appropriate for an investor with a low risk tolerance.

Managers of target date funds assume a one-size-fits-all portfolio structure, meaning they will invest the same way for all shareholders of the fund. When choosing the most appropriate investments, you'll want to consider many variables, such as life expectancy, risk tolerance, and the funds already in your portfolio.

Your own risk tolerance can be influenced by both your personality and current financial situation. As finances change over time, your tolerance for risk might change, as well, in spite of how you relate to money on a personal level. Risk tolerance is worth reassessing from time to time.

The Best Target Date Retirement Funds

Similar to selecting other mutual funds, the best target date funds will be those with a combination of below-average expense ratios, broadly diversified portfolios, and average to above-average long-term performance.

Here are the mutual fund families offering the best target date retirement funds.

  • Vanguard Target Retirement Funds: Not only has Vanguard been offering its target retirement funds for more than 15 years, but it also uses its index funds as underlying holdings for each portfolio. Therefore, investors who use Vanguard target funds are assured at least "average" returns with broadly diversified portfolios. The king of low-cost index funds is a natural choice for one of the best target date mutual fund families. Vanguard's target retirement funds average 0.12% expenses, whereas the average target date fund averages 0.55%.
  • Fidelity Freedom Funds. Similar to Vanguard, Fidelity has a solid selection of low-cost mutual funds, and its Freedom Funds uphold that tradition. Fidelity has been offering target date retirement funds longer than most other mutual fund companies. Its long track record illustrates its skill in building low-cost, broadly diversified portfolios.
  • T. Rowe Price Target Date Funds. Historically, the target retirement funds at T. Rowe Price have been good performers compared to their category peers. However, its allocations have been more tilted toward stocks. That typically makes for greater performance, which can be a prudent goal in the early years of retirement saving. But the relatively higher risk (and lower returns in down markets) may be too volatile for some investors with low risk tolerance.

Bottom Line

Target retirement funds, also called "lifecycle funds," can be smart investment choices for retirement savings because of their key benefits, such as simplicity, diversification, and automated shifting of allocation over time. However, target date funds might not be ideal for every investor. Be sure to study how these unique funds work prior to investing.

The Balance does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.

Article Sources

  1. Investor.gov. "Target Date Funds." Accessed Dec. 16, 2021.

  2. Vanguard Investments. "Vanguard Target Retirement Funds." Accessed Dec. 16, 2021.

  3. Fidelity Investments. "Fidelity Freedom Funds." Accessed Dec. 16, 2021.