Our top picks of timely offers from our partners

More details
Rocket Mortgage
Learn More
Terms Apply
Rates recently increased and could continue to rise - look into refinancing with one of our top picks
CIT Bank
Learn More
Terms Apply
Earn 14x the national average with a Savings Connect account. Member FDIC
Chime
Learn More
Terms Apply
No late fees, no monthly service fees, and get paid up to 2 days early with direct deposit
BMO Harris Smart Advantage™
Learn More
Terms Apply
$300 bonus after meeting deposit requirements - offer ends October 1st
Rocket Money
Learn More
Terms Apply
Track your spending and net worth, and cancel unwanted subscriptions
Select independently determines what we cover and recommend. We earn a commission from affiliate partners on many offers. Read more about Select on CNBC and on NBC News, and click here to read our full advertiser disclosure.
Investing

Target-date funds: A hands-off investing approach to help you build wealth for retirement

With a target-date fund, your investments mirror your risk tolerance as you near retirement.

Share
Fabio Camandona / Eyeem | Eyeem | Getty Images

You may not realize it, but your money could be already growing in what's called a target-date fund. Many employer-sponsored retirement plans, such as a 401(k), automatically default to this type of mutual fund as an employee's main investment vehicle for their future.

In short, target-date funds build your investment portfolio around the year you plan to retire. It's a pretty simple approach, and Select covers the nuts and bolts below.

Subscribe to the Select Newsletter!

Our best selections in your inbox. Shopping recommendations that help upgrade your life, delivered weekly. Sign-up here.

How target-date funds work

If you plan to retire in, say, 2060, you would pick out a fund closest to 2060. The fund would then choose a combination of stocks and bonds that allow you to take on the largest amount of risk early on. For example, this may look like a portfolio of 90% stocks, or equities, and 10% bonds, or fixed income. Generally, stocks offer potentially greater reward but more risk than bonds, so the idea is to take advantage of that high risk and possible high reward while you're still a ways away from retiring.

As you approach your target retirement date, in this case the year 2060, you'll see the fund shift its investments, and the fund's portfolio will get more conservative as your non-working years draw nearer. For example, this may look like shifting to a portfolio of 50% stocks and 50% bonds — a decrease in stock holdings and an increase in bond holdings — since bonds are considered lower risk assets.

Pros of target-date funds

Target-date funds stand out as a simple approach to saving for retirement. Their hands-off concept allows just about anyone to invest without needing to know much beyond the year they want to retire. These funds will rebalance periodically and automatically change your holdings to reflect your risk tolerance over time. All an investor really needs to do is make consistent contributions. This setup also takes away any emotion-based investing, such as trying to time the market, where investors allow their emotions to drive — and at times hinder — their decisions.

Compared to actively managed funds, target-date funds also have lower management costs, better known as expense ratios. The fees of target-date funds can be higher, however, when compared to index-fund investing (another form of passive investing) in funds that follow the S&P 500, for instance.

Cons of target-date funds

On the flip side, target-date funds come with some cons as well, one being that they are modeled assuming a one-size-fits-all approach. For example, the funds default to the idea that bonds will always be less risky than stocks, but this isn't true in all economic climates (just look at 2022 as an example). Investors may want a more diverse asset allocation than what target-date funds offer, too.

Though the simplicity of target-date funds can be seen as a positive for many investors, it can actually be a disadvantage to other investors who need to take more into account than just their expected retirement year, such as assets they may have like real estate or cash savings set aside.

Lastly, target-date fund fee structures can be quite complicated to understand. Target-date funds have both a management fee and a fund-of-funds management fee, meaning that your target-date fund portfolio has multiple mutual funds within it, each with its own expense ratio. Take a careful look at what the fund company charges, as they differ from company to company.

Where to find target-date funds

The good news is you don't have to have access to a 401(k) plan in order to take advantage of a target-date fund. You can still save for retirement through a target-date fund by putting your money into a tax-advantaged traditional IRA or Roth IRA.

You can also invest in target-date funds through big-name brokers such as Vanguard, T. Rowe Price or Fidelity — each of these platforms offer their own target-date funds that you can purchase. With brokerage accounts, however, keep in mind that you'll likely have greater tax implications when selling mutual funds than you would with a tax-advantaged retirement account.

Vanguard

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Vanguard account, but minimum $1,000 deposit to invest in many retirement funds; robo-advisor Vanguard Digital Advisor® requires minimum $3,000 to enroll

  • Fees

    Fees may vary depending on the investment vehicle selected. Zero commission fees for stock and ETF trades; zero transaction fees for over 3,000 mutual funds; $20 annual service fee for IRAs and brokerage accounts unless you opt into paperless statements; robo-advisor Vanguard Digital Advisor® charges up to 0.20% in advisory fees (after 90 days)

  • Bonus

    None

  • Investment vehicles

    Robo-advisor: Vanguard Digital Advisor® IRA: Vanguard Traditional, Roth, Rollover, Spousal and SEP IRAs Brokerage and trading: Vanguard Trading Other: Vanguard 529 Plan

  • Investment options

    Stocks, bonds, mutual funds, CDs, ETFs and options

  • Educational resources

    Retirement planning tools

Terms apply.

Fidelity Investments

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go account, but minimum $10 balance for robo-advisor to start investing. Minimum $25,000 balance for Fidelity Personalized Planning & Advice

  • Fees

    Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF, options trades and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go is free for balances under $10,000 (after, $3 per month for balances between $10,000 and $49,999; 0.35% for balances over $50,000). Fidelity Personalized Planning & Advice has a 0.50% advisory fee

  • Bonus

    Find special offers here

  • Investment vehicles

    Robo-advisor: Fidelity Go® and Fidelity® Personalized Planning & Advice IRA: Fidelity Investments Traditional, Roth and Rollover IRAs Brokerage and trading: Fidelity Investments Trading Other: Fidelity Investments 529 College Savings; Fidelity HSA®

  • Investment options

    Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares

  • Educational resources

    Extensive tools and industry-leading, in-depth research from 20-plus independent providers

Terms apply.

As another hands-off investing alternative to target-date funds, robo-advisors are an option to consider. While they aren't necessarily as directly modeled to invest for retirement as target-date funds are, they certainly can be used to passively invest for the future. Robo-advisors will customize a portfolio for you based on your risk tolerance, goals and timeline, and they will automatically rebalance your portfolio over time. Two of the pioneers in this space are Betterment and Wealthfront, both of which made Select's list of the best robo-advisors.

Betterment

On Betterment's secure site
  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For Betterment Digital Investing, $0 minimum balance; Premium Investing requires a $100,000 minimum balance

  • Fees

    Fees may vary depending on the investment vehicle selected. For Betterment Digital Investing, 0.25% of your fund balance as an annual account fee; Premium Investing has a 0.40% annual fee

  • Bonus

    Up to one year of free management service with a qualifying deposit within 45 days of signup. Valid only for new individual investment accounts with Betterment LLC

  • Investment vehicles

  • Investment options

    Stocks, bonds, ETFs and cash

  • Educational resources

    Betterment RetireGuide™ helps users plan for retirement

Terms apply.

Wealthfront

On Wealthfront's secure site
  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. $500 minimum deposit for investment accounts

  • Fees

    Fees may vary depending on the investment vehicle selected. Zero account, transfer, trading or commission fees (fund ratios may apply). Wealthfront annual management advisory fee is 0.25% of your account balance

  • Bonus

    None

  • Investment vehicles

  • Investment options

    Stocks, bonds, ETFs and cash. Additional asset classes to your portfolio include real estate, natural resources and dividend stocks

  • Educational resources

    Offers free financial planning for college planning, retirement and homebuying

Terms apply.

Catch up on Select's in-depth coverage of personal financetech and toolswellness and more, and follow us on FacebookInstagram and Twitter to stay up to date.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
Plenty of rewards and benefits including 4X points per dollar for dining at restaurants worldwide
Enjoy an intro APR on purchases plus, Discover will match all the cash back you've earned at the end of your first year.