investing

What Happens to Your Target-Date Fund When You Hit Retirement Age

Target-date funds employ one of two basic asset-allocation strategies once you reach retirement age. Here’s why that matters.

Target-date funds make investing for retirement relatively easy. Choose a fund with the year in its name closest to the time you plan to retire, then sit back and let the fund’s managers decide how much of your savings to invest in stocks and bonds (and occasionally other asset classes). But what happens when your target-date fund hits the target year? The answer varies, depending on which sponsor’s fund you own.

Target funds become more conservative over time, as their managers trim a fund’s allotment to stocks and boost the allocation to bonds and cash. And every target fund follows its own “glide path”—the shift in asset mix over time.

Broadly speaking, there are two kinds of target-date funds. The glide path of one group takes you “through” the target date, continuing to shift the asset mix over a predetermined number of years. Such funds typically hit the target year with 50% of their assets in stocks and reach the end of their glide paths with 30% in stocks.

“To” funds have a different glide path. These target funds stop adjusting asset allocations once they reach the target year. With 30% to 40% of their assets in stocks, “to” funds tend to be more conservatively positioned at the target year than “through” funds. Whatever the track, most target funds eventually merge with a “retirement” or “income” fund with a stock-bond mix that stays unchanged.

Two popular target-date series, Fidelity Freedom and Vanguard Retirement follow “through” glide paths, hitting the target year with stock allocations of 55% and 50%, respectively. Fidelity recently increased the duration of its post-target-date glide path from 15 years to 19 years, effectively keeping more in stocks for longer. “People are living longer, so the time horizon should be a little longer,” says Freedom series co­manager Andrew Dierdorf. When a Freedom fund reaches its final allo­cation—24% in stocks and 76% in bonds—it merges with Fidelity Freedom Income (symbol FFFAX). Vanguard’s glide path continues for seven years after the target year, reaching a final mix of 30% in stocks and 70% in bonds. At that point, the target fund merges with Vanguard Target Retirement Income (VTINX).

T. Rowe Price’s Retirement and Target series don’t combine with an income fund, largely because their glide paths keep rolling for a whopping 30 years past the target year. At their end points, funds in the Price series have 20% of their assets in stocks and the rest in bonds. For more on our favorite target-date funds, see The Best Target Date Funds for Retirement Savers.

What about those “to” series, with allocations that stop gliding at the target year? The shifting may cease, but the funds don’t die. For instance, two years after a target fund in JPMorgan’s SmartRetirement series hits its target year, the fund merges into a static portfolio with 33% of assets in stocks, 50% in bonds and the rest in cash.

If you invest through a 401(k), you’re limited to the series that your plan offers. But if you don’t like a fund’s mix, choose a fund with a different target year. Think 33% in stocks is too timid? No sweat. Just pick a fund with a target year further into the future. If you think the allocation is too aggressive, choose a fund with a target date some years before you plan to retire.

All of this underscores the importance of knowing what happens with your fund as the target year approaches, says Anne Lester, head of retirement solutions at JPMorgan Asset Management. “Ask yourself if it’s the right level of risk for you given where you are in your life,” she says.

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