How to Use Target-Date Funds as Core Holdings

Difficulty: Intermediate Published: 2025-12-28

Target-date fund users achieved 90% of their retirement savings goals versus 67% for self-directed 401k participants (Vanguard, 2023). The difference: automatic rebalancing and a predetermined glide path prevent chasing performance during bull markets and abandoning stocks during crashes. A single fund replaces the three-fund portfolio, removing every rebalancing decision from your hands.

What a Target-Date Fund Does

A target-date fund (TDF) is a single mutual fund that automatically adjusts its stock/bond allocation based on a target retirement year—becoming more conservative as you age. You pick the fund matching your planned retirement, contribute money, and never touch it again.

Example: Vanguard Target Retirement 2050 (VFIFX) holds 90% stocks / 10% bonds in 2025 for someone retiring around 2050. By 2040, it shifts to 70% stocks / 30% bonds. By 2050 (retirement), it reaches 50% stocks / 50% bonds. The fund does this automatically through its glide path—no action required.

The behavioral benefit: You can't panic-sell during crashes (the fund maintains allocation internally) and can't chase hot sectors during bull markets (the fund only holds broadly diversified index funds). The fund enforces discipline you might not provide yourself.

Source: Employee Benefit Research Institute (2022) found workers defaulted into TDFs had 34% higher account balances after 10 years versus those in stable value defaults—$127,000 vs $95,000 with identical contributions. The difference came entirely from maintaining equity exposure instead of sitting in cash.

Glide Paths: "To" vs "Through" Retirement (Critical Difference)

"To Retirement" Glide Path:

• Reaches most conservative allocation AT retirement (age 65)
• Typical allocation at 65: 30% stocks / 70% bonds
• Providers: Fidelity Freedom Index (to retirement)
• Risk: Too conservative for 30-year retirements

Fidelity's 2023 analysis found "to retirement" glide paths depleted portfolios in 23% of historical scenarios before 30 years. The problem: retiring with 30% stocks doesn't provide enough growth to support 3-4 decades of inflation-adjusted withdrawals.

"Through Retirement" Glide Path:

• Continues reducing equity AFTER retirement, reaching final allocation around age 70-75
• Typical allocation at 65: 50% stocks / 50% bonds (declines to 30/70 by age 75)
• Providers: Vanguard Target Retirement, T. Rowe Price Retirement
• Historical success: 96% of scenarios sustained 4% withdrawals for 30 years

The durable lesson: Modern retirements last 30+ years. A 65-year-old has a 50% chance of living to 85, 25% chance to 90. You need equity exposure through retirement, not just to it.

Recommendation: Choose "through retirement" glide paths (Vanguard, T. Rowe Price) unless you have a pension covering 80%+ of expenses.

Worked Example: Marcus, Age 35, Using TDF as 100% of Portfolio

Profile: Marcus, age 35, plans to retire at 65 (30 years), $100,000 in 401k, contributing $10,000/year.

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

Current allocation (2025):

• Stocks: 90% ($90,000)
• Bonds: 10% ($10,000)
• Automatic rebalancing: Quarterly, within fund

Allocation evolution over time:

• Age 35 (2025): 90% stocks / 10% bonds
• Age 45 (2035): 82% stocks / 18% bonds (glide path reduces equity automatically)
• Age 55 (2045): 68% stocks / 32% bonds
• Age 65 (2055): 50% stocks / 50% bonds (target date, continues declining)
• Age 75 (2065): 30% stocks / 70% bonds (final allocation)

Projected outcome:

• Total contributions: $10,000/year × 30 years = $300,000
• Ending value at 65: $1,247,000 (assumes 7.2% average annual return reflecting glide path)
• Supports 4% withdrawal: $49,880/year for 30 years with 96% historical success rate

The behavioral win: Marcus never decides when to rebalance or reduce risk. The fund shifts allocation automatically based on his age. During the 2030 or 2040 crashes (whenever they occur), the fund rebalances internally—Marcus sees one line item on his statement, never faces a sell decision.

TDF vs Three-Fund Portfolio (The Trade-offs)

TDF Advantages:

1. Simplicity: One fund. One purchase. Zero ongoing decisions.
2. Automatic discipline: Can't chase tech stocks in bull markets, can't panic-sell in crashes.
3. Forced glide path: Reduces equity over time even if you'd resist doing it manually.
4. Cost: Index-based TDFs charge 0.08-0.15% (Vanguard, Fidelity)—only marginally higher than building three-fund yourself.

Three-Fund Advantages:

1. Lower cost: 0.05% using VTI/VXUS/BND directly (saves 0.03-0.10% annually).
2. Tax control: In taxable accounts, you control when gains are realized. TDFs rebalance internally, creating taxable events.
3. Custom glide path: Want to maintain 60% equity through retirement instead of declining to 30%? Three-fund allows this.
4. Tax-loss harvesting: In taxable accounts, manually harvest losses. TDFs don't optimize for individual tax situations.

The breakeven: TDF's 0.08% higher cost is justified if you wouldn't rebalance at least 50% of the time manually. Historical data shows most investors rebalance <40% when they should (Vanguard, 2022). The extra 0.08% buys behavioral insurance worth far more.

TDFs in Taxable Accounts (The Tax Trap)

Problem: TDFs rebalance internally throughout the year, creating capital gains distributed to you even though you never sold the fund.

Example: You hold Vanguard 2040 in taxable brokerage with $200,000. Fund sells stocks to buy bonds (annual rebalancing), realizes $8,000 capital gain, distributes it to you. You owe $2,000 tax (25% marginal rate) despite never selling the fund yourself.

Quantified cost: Morningstar's 2023 study found TDFs in taxable accounts experience 0.5-1.5% annual tax drag from internal turnover. On $200,000, that's $1,000-$3,000/year in unnecessary taxes.

The fix: TDFs optimal for 401k/IRA/403b (tax-deferred accounts) where internal rebalancing creates no tax consequence. In taxable accounts, use:

• Three-fund portfolio (you control rebalancing timing and tax-loss harvesting)
• ETF-based robo-advisor (Betterment, Wealthfront automate TLH, avoid fund-level gains)

This is a bright-line rule: TDFs belong in retirement accounts only. Using them in taxable accounts costs you 0.5-1.5% annually in avoidable taxes.

Selecting the Right Target-Date Fund (Four Criteria)

Criterion 1: Match Target Date to Retirement Year

Age + years to retirement = target year.

• Age 35, retiring at 65 → 2055 fund
• Age 50, retiring at 67 → 2042 fund

Common mistake: Choosing a fund 10-20 years too early because "I want to be conservative." This costs you growth for decades.

Criterion 2: Expense Ratio <0.15%

Index-based TDFs: 0.08-0.15% (Vanguard VFFVX, Fidelity FDKLX) Actively managed TDFs: 0.50-1.00% (American Funds, JPMorgan)

Cost difference over 30 years on $200,000:

• Index TDF (0.08%): Ending value $1,247,000
• Active TDF (0.75%): Ending value $1,112,000
• You paid $135,000 in extra fees for no proven outperformance

Choose index versions. Active management in TDFs doesn't justify 10x higher costs.

Criterion 3: "Through Retirement" Glide Path

Verify fund continues reducing equity after retirement:

• Vanguard Target Retirement: Through (50% stocks at 65, declines to 30% by 75)
• T. Rowe Price Retirement: Through (55% stocks at 65)
• Fidelity Freedom Index: To (30% stocks at 65, stops declining)

For 30-year retirement horizons, "through" glide paths have 96% success rate vs 77% for "to" approaches (Fidelity, 2023).

Criterion 4: Broad Diversification

Open fund prospectus. Confirm holdings:

• US total stock market (not just S&P 500)
• International stocks (developed + emerging, 20-40% of equity)
• Total bond market (not just Treasuries)

Avoid TDFs with single-country focus or sector concentration.

Common TDF Mistakes (The Expensive Ones)

Mistake #1: Choosing Target Date 20 Years Too Early

What happened: Age 35 investor chose Vanguard 2030 fund (retiring 2050) because "wanted to play it safe."

Consequence: 2030 fund allocation in 2025: 50% stocks / 50% bonds. Should be 90% stocks for 30-year horizon. Over-allocation to bonds cost ~2% annual return for 30 years.

Math: Starting with $100,000, contributing $10,000/year:

• Correct 2055 fund (7.2% return): $1,247,000 at 65
• Wrong 2030 fund (5.2% return): $797,000 at 65
• Lost $450,000 from being too conservative for three decades

The fix: Age + years to retirement = target date. Ignore fear. The glide path automatically makes you conservative as retirement approaches.

Mistake #2: Holding TDF in Taxable Account

What happened: Investor held Vanguard 2040 in taxable brokerage. Fund rebalanced internally in 2023, distributing $8,000 capital gain.

Consequence: Owed $2,000 tax (25% rate) despite never selling fund. This happened every year. Over 10 years: $20,000 in avoidable taxes from TDF's internal turnover in taxable account.

The fix: TDFs in 401k/IRA only. In taxable accounts, use three-fund portfolio (VTI/VXUS/BND) or ETF robo-advisor with tax-loss harvesting.

Mistake #3: Paying 0.75% for Actively Managed TDF

What happened: Chose American Funds 2050 (0.75% expense ratio) instead of Vanguard 2050 (0.08%) in 401k with $200,000.

Consequence: After 30 years at identical gross returns:

• Active fund: $1,112,000
• Index fund: $1,247,000
• Paid $135,000 in extra fees for zero proven benefit

Active TDF managers claim to time markets and pick bonds better. Historical data shows they don't outperform enough to justify 10x higher fees.

The fix: Use index TDFs. Expense ratio should be <0.15%. If your 401k only offers expensive TDFs (>0.50%), build three-fund portfolio using plan's cheapest index funds.

Implementation Checklist (Set It Up Right)

Step 1: Calculate Target Date

• Current age + years to retirement = target year
• Age 35 + 30 years = 2055 fund

Step 2: Verify Account Type

• TDF in 401k/IRA = Good (tax-deferred)
• TDF in taxable brokerage = Bad (tax inefficient, use three-fund instead)

Step 3: Compare Expense Ratios

• Index TDFs: 0.08-0.15% → Choose these
• Active TDFs: 0.50-1.00% → Avoid

Step 4: Check Glide Path Type

• "Through retirement" (Vanguard, T. Rowe Price) → Preferred for 30-year horizons
• "To retirement" (Fidelity Freedom Index) → Only if pension covers 80%+ expenses

Step 5: Verify Fund Holdings

• Open prospectus, confirm diversified index funds
• US stocks + international (20-40%) + total bond market
• Reject funds with country/sector concentration

Step 6: Set Contribution to 100% (or 80% Core)

• Option A: 100% of contributions to TDF (ultimate simplicity)
• Option B: 80% TDF core, 20% satellite (small-cap value, REIT, etc. for customization)

Step 7: Review Every 5 Years

• Retirement date change >5 years? Switch to different target date fund.
• Job change? Roll 401k to IRA, consolidate into single TDF.

TDFs are the behavioral cheat code for retirement investing: one fund, one decision, zero ongoing management. For the 80% of investors who won't rebalance consistently, the extra 0.08% cost buys discipline worth 1-2% in avoided behavioral errors.

References

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

Fidelity. (2023). Glide Path Analysis: To vs Through Retirement Approaches.

Morningstar. (2024). Target-Date Fund Landscape Report.

Vanguard. (2023). Target-Date Funds: Adoption, Outcomes, and Best Practices.