How to Use Target-Date Funds as Core Holdings

Target-date funds hold over $4 trillion in assets and account for roughly two thirds of all new 401(k) contributions (Morningstar, 2025 Target-Date Fund Landscape Report). Their appeal is straightforward: a single fund that automatically shifts from stocks to bonds as you age, removing every rebalancing and asset-allocation decision from your plate. For most retirement savers, that automation is worth more than any fee savings from building a portfolio manually.

How Target-Date Funds Work

A target-date fund (TDF) is a single mutual fund holding a diversified mix of stocks and bonds that automatically becomes more conservative as the target retirement year approaches. You select the fund whose date is closest to when you plan to retire, contribute regularly, and leave it alone.

Take Vanguard Target Retirement 2055 (VFFVX). In 2025, it holds roughly 90% stocks and 10% bonds for someone planning to retire around 2055. By 2045, it will have shifted to approximately 68% stocks and 32% bonds. By 2055, it reaches 50% stocks and 50% bonds and continues adjusting into retirement. This predetermined schedule is called the fund’s glide path.

The behavioral case is well documented. Vanguard’s How America Saves 2025 report found that only 1% of participants invested solely in a target-date fund made any trade during 2024. By contrast, self-directed participants trade far more frequently, often at the worst possible times. The Employee Benefit Research Institute found that workers defaulted into TDFs had 34% higher account balances after ten years than those defaulted into stable-value funds—$127,000 versus $95,000 on identical contribution levels (EBRI, 2022). The difference came from maintaining equity exposure rather than sitting in near-cash.

Glide Paths: “To” Versus “Through” Retirement

This distinction matters more than most investors realize.

“To Retirement” glide paths reach their most conservative allocation at retirement age. Example: Fidelity Freedom Index funds land at roughly 30% stocks / 70% bonds at age 65 and stop adjusting. The risk is that a 30-year retirement (entirely plausible—a 65-year-old has a 25% chance of reaching 90) may not be adequately supported by 30% equity exposure.

“Through Retirement” glide paths continue reducing equity after retirement, reaching their final allocation around age 72–75. Vanguard’s Target Retirement series holds 50% stocks at age 65, declining to 30% stocks by age 75. T. Rowe Price Retirement funds hold roughly 55% stocks at 65. The extended equity exposure provides more growth potential during what could be three decades of withdrawals.

Research from PIMCO and others shows the difference between “to” and “through” outcomes is more nuanced than marketing suggests—sequence-of-returns risk and market conditions matter as much as the glide path structure itself. Still, for most retirees without guaranteed income sources, maintaining equity exposure through retirement is the more prudent default.

Exception: If you have a pension or annuity covering 80% or more of your retirement expenses, a “to” glide path’s lower volatility may be appropriate since you are less dependent on portfolio withdrawals.

Worked Example: Marcus, Age 35

Profile: Marcus is 35, plans to retire at 65 (30-year horizon), has $100,000 in his 401(k), and contributes $10,000 per year.

Fund: Vanguard Target Retirement 2055 (VFFVX), expense ratio 0.08%.

Allocation over time:

• Age 35: 90% stocks / 10% bonds
• Age 45: 82% stocks / 18% bonds
• Age 55: 68% stocks / 32% bonds
• Age 65: 50% stocks / 50% bonds
• Age 75: 30% stocks / 70% bonds (final allocation)

Projected growth (assuming 7% annualized return reflecting the blended glide path):

Using the future-value formula—FV = PV(1 + r)^n + PMT × ((1 + r)^n − 1) / r:

• FV of $100,000 lump sum at 7% for 30 years: $761,226
• FV of $10,000 annual contributions at 7% for 30 years: $944,608
• Total projected value at 65: approximately $1,706,000
• Total contributions over 30 years: $400,000 ($100k initial + $300k in annual contributions)
• At a 4% withdrawal rate: roughly $68,200 per year

Marcus never decides when to rebalance, never faces a sell decision during a downturn, and never needs to manually reduce equity exposure as he ages.

What if Marcus had picked the wrong target date? Choosing a 2030 fund at age 35 (“to be conservative”) would mean holding roughly 50% stocks immediately instead of 90%. Assuming a 5% blended return from the more conservative allocation:

• Total projected value: approximately $1,097,000
• Cost of the mismatch: roughly $609,000 over 30 years

The glide path handles the transition to conservative allocations automatically. Choosing an earlier target date defeats the purpose.

TDF Versus Three-Fund Portfolio

When the TDF wins:

1. Simplicity. One fund, one purchase, zero ongoing decisions.
2. Behavioral discipline. You cannot chase sectors in bull markets or panic-sell during crashes. The fund rebalances internally.
3. Automatic glide path. Equity reduction happens whether or not you would have done it yourself.
4. Competitive cost. Index-based TDFs charge 0.08–0.12%. The asset-weighted industry average has fallen to 0.27% (Morningstar, 2025).

When the three-fund portfolio wins:

1. Marginally lower cost. Building with VTI/VXUS/BND directly runs about 0.04–0.05%, saving 0.03–0.07% annually.
2. Tax control in taxable accounts. You decide when gains are realized. TDFs rebalance internally, potentially distributing capital gains.
3. Custom glide path. If you want to hold 60% equity through retirement rather than declining to 30%, three funds let you do that.
4. Tax-loss harvesting. In taxable accounts, you can harvest losses on individual positions. TDFs cannot optimize for your tax situation.

The practical threshold: The TDF’s extra cost (roughly 0.03–0.07% over a DIY portfolio) is justified if there is any realistic chance you would skip rebalancing, avoid reducing equity as you age, or panic-sell during a drawdown. Vanguard’s data shows most participants in self-directed accounts do not rebalance regularly.

TDFs and Taxable Accounts

Target-date funds belong in tax-advantaged accounts—401(k)s, IRAs, and 403(b)s—where internal rebalancing creates no taxable event.

In a taxable brokerage account, the fund’s routine rebalancing (selling appreciated stocks to buy bonds) can generate capital gains distributions you owe tax on even though you never sold a share. Additionally, the bond interest within the fund is taxed as ordinary income.

The actual tax drag depends on several factors: the fund’s turnover rate, your marginal tax bracket, and whether the fund is experiencing net inflows (which allow rebalancing through new purchases rather than sales). A high-income investor in a high-turnover fund will face meaningfully more drag than a moderate-income investor in a low-turnover index TDF. Vanguard’s own target-date funds generated an unexpected round of large capital gains distributions in 2021 when institutional share class changes triggered significant realized gains—a reminder that even well-run index TDFs can create tax surprises in taxable accounts.

For taxable accounts, use a three-fund portfolio (VTI, VXUS, BND or equivalents) where you control rebalancing timing, or an ETF-based portfolio where you can harvest losses.

Bond Duration Risk Within TDFs

As a TDF’s bond allocation grows near and during retirement, investors become more exposed to interest rate risk on the fixed-income side. When rates rise, bond prices fall, and the magnitude depends on the portfolio’s duration. Most TDFs hold intermediate-duration bond funds (average duration of 5–7 years), meaning a 1-percentage-point rise in rates would temporarily reduce the bond sleeve’s value by roughly 5–7%.

This is manageable within a diversified TDF but worth understanding: near retirement, when bonds may represent 50% of your portfolio, a sharp rate increase can produce a noticeable short-term decline. The bonds will eventually mature at par, and higher rates improve future income—but the interim volatility can be unsettling if you are not expecting it.

Selecting the Right Fund

Match the target date to your actual retirement year. Your expected retirement year (not “when I want to start being conservative”) determines the fund. Age 35 retiring at 65 means a 2055 fund. Age 50 retiring at 67 means a 2042 fund (round to the nearest available vintage, typically offered in 5-year increments).

Require an expense ratio below 0.15%. Index-based TDFs from Vanguard (0.08%), Fidelity Freedom Index (0.12%), and Schwab (0.08%) all qualify. Actively managed TDFs often charge 0.50–1.00%. Over 30 years on $100,000 with $10,000 annual contributions, the difference between a 0.08% index TDF and a 0.75% active TDF is roughly $233,000—calculated as the compounding difference between 6.92% net and 6.25% net returns. Active management in TDFs has not historically justified that cost.

Confirm broad diversification. Open the fund’s prospectus and verify it holds a US total stock market index, international stocks (typically 20–40% of equity), and a total bond market index. Avoid TDFs with single-country tilts or sector concentration.

Check the glide path type. For most investors without pensions, “through retirement” glide paths (Vanguard, T. Rowe Price) are preferable. If you have a pension covering the majority of expenses, a “to” glide path’s lower post-retirement volatility is reasonable.

Implementation Checklist

1. Calculate your target date. Expected retirement year, rounded to nearest available fund vintage.
2. Confirm the account type. TDF in 401(k)/IRA/403(b): appropriate. TDF in taxable brokerage: use three-fund portfolio instead.
3. Select an index-based TDF under 0.15% expense ratio. If your plan only offers expensive active TDFs (above 0.50%), build a three-fund portfolio from the plan’s cheapest index options.
4. Verify the glide path. “Through retirement” for most people; “to retirement” only if pension income covers 80%+ of expenses.
5. Set contributions to 100% into the TDF for maximum simplicity, or 80% TDF with 20% satellite holdings if you want modest customization.
6. Review every five years. If your retirement date shifts by more than five years, switch fund vintages. When changing jobs, consolidate old 401(k) balances into a single TDF in an IRA.

Target-date funds are not the cheapest possible option, and they are not infinitely customizable. What they provide is a disciplined, automatic investment process that most investors will stick with—and sticking with a reasonable plan beats abandoning an optimal one.

References

Employee Benefit Research Institute. (2022). The Impact of Target-Date Funds on Retirement Readiness.

Morningstar. (2025). Target-Date Fund Landscape Report.

PIMCO. (2024). The Impact of “To” Versus “Through” Glide Paths.

Vanguard. (2025). How America Saves 2025.