Target-date fund

Also called Lifecycle fund

A fund that holds a mix of stocks and bonds and gradually shifts toward bonds and cash as a chosen target year, usually retirement, approaches.

What it means

A target-date fund is named for a year, such as 2055, that roughly matches when an investor expects to retire. Far from that date it holds mostly stocks for growth; as the year nears it moves toward bonds and cash on a preset schedule called the glide path. It rebalances automatically, making it an all-in-one portfolio.

The fund makes or loses money as its underlying stock and bond funds do, and it can lose value even at or after the target date. Glide paths differ between fund families, so two funds with the same year can hold very different mixes. Fees include the costs of the underlying funds. In a taxable account, its dividends and distributions are taxed yearly, so these funds are most often held in retirement accounts.

Example

Suppose a 30-year-old expecting to retire around 2055 picks a 2055 fund. Today it might hold mostly stocks, and over the next few decades it will gradually shift a larger share into bonds without the investor making changes.

How it’s used

A common default investment in employer retirement plans
A single-fund portfolio for people who prefer not to manage allocation
Automatically reducing risk as retirement nears

Strengths and weaknesses

Strengths

Diversified, rebalanced portfolio in one fund
Risk automatically declines over time
Removes the need to pick and adjust investments

Weaknesses

One-size glide path may not fit a person’s risk tolerance or other assets
Fees vary widely between providers
Can still lose money near or after the target year

Good to know

Holding a target-date fund alongside other funds can undo its built-in allocation.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.