Target-Date Funds

Why this matters

If you've ever been enrolled in a workplace retirement plan without picking an investment, your money may well have gone into a target-date fund. Many people own one without knowing what it does. It's worth understanding, because it quietly decides one of the most important things about your investments: the mix of stocks and bonds, and how that mix changes over time.

How they work

A target-date fund is named after a year, such as "2060." You pick the fund closest to the year you expect to retire. The fund holds a mix of stocks, bonds, and cash, often by owning other funds, and it adjusts that mix automatically over time.

The idea follows directly from Time Horizon and Risk Tolerance. When retirement is decades away, the fund holds mostly stocks for growth. As the target year approaches, it gradually shifts to a more conservative mix, typically moving from a large share in stocks toward more bonds.¹ The schedule it follows is called its glide path.

"To" and "through"

There are two kinds of glide path. A fund with a "to" glide path keeps shifting its mix until the target date, and generally not after. A fund with a "through" glide path keeps shifting up to and past the target date. Because of this, "to" funds typically become conservative earlier, so at many points they hold lower-risk, lower-return investments than "through" funds.²

The share in stocks for two hypothetical funds with the same target year:

Years until 2045	Fund A ("through")	Fund B ("to")
40 years before	90% stocks	90% stocks
20 years before	80%	75%
10 years before	65%	55%
At 2045	50%	35%
10 years after	35%	35%, no further change

The numbers are hypothetical, but the pattern is real: target-date funds with the same target year can follow different glide paths.² In 2045, someone in Fund A would have half their money in stocks, and someone in Fund B about a third. Same label, very different risk.

The rest of this lesson is for members

Still to come in this lesson: Why they're a common default, Costs, the key takeaways, and 2 quiz questions with explanations.

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