5 Best Target Date Funds for Retirement

Vanguard Target Retirement 2060 Fund Investor Shares have the lowest expense ratio mixed with a strong 10-year average annual return of 8.08%.

Retirement investing, like all aspects of retirement planning, is complex. Placing funds in a target date retirement fund helps simplify the process while providing diversified investments in stocks and bonds. The investment allocations update as you age and near retirement to help manage risk and protect your funds. But you have to watch out because some of these funds have high annual fees that can eat into the returns you see from them. Learn the best options to ensure strong returns that help you prepare for restful and relaxing retirement years.

Best Target Date Funds For Retirement

The best target date funds balance annual fees with investment returns to ensure your money grows and provides a comfortable retirement. 

1. Vanguard Target Retirement 2060 Fund Investor Shares

There is a Vanguard target retirement fund for each year so you can plan accordingly. It doesn’t have to correspond to the year 2060 if that doesn’t align with your timeline. Know that these funds use a 5-year target window for your retirement with the year listed being the latest of those five years. That way, the strategy becomes more conservative in the final years leading up to retirement to ensure your funds are stable and indicate whether you’re ready to retire.

This fund has an expense ratio of just 0.08%, which is very low. Yet its 10-year average annual return is at 8.08%. Your funds go into broad market stock and bond index funds. 

2. Fidelity Freedom Index 2060 Fund Investor Class

With an expense ratio of 0.12%, this fund is another great one for helping prepare you for retirement. Over the life of the fund, it has earned 8.04% annually. Its asset allocation is 54% U.S. equities, 36% non-US equities and 10% bonds.

3. JPMorgan SmartRetirement Blend 2060 Fund

This fund has earned an average annual return of 8.76% since its inception in August 2016. It has an expense ratio of 0.29%. It includes a portfolio of 14 mutual funds and cash equivalents. You’ll get U.S. and international exposure with a broad range of fixed-income holdings.

4. Nuveen Lifecycle Index 2060 Fund Premier Class

This target date fund has an average annual return of 9.16% with an expense ratio of 0.20%. It includes five positions spread across U.S. equity, international equity, fixed income and short-term investments. 

5. TIAA-CREF Lifecycle Index 2060 Advisor

With an impressive 9.73% average annual return on investment since December 2015, this target date fund is a great pick. It has an expense ratio of 0.20%. While the fund uses a portfolio of just four component funds — three of which are stock funds and one bond fund — it still has adequate diversity to provide stability and strong returns.

What Is a Target Date Fund?

Target date funds help take the guesswork out of retirement investing by selecting good stocks for you and managing your retirement funds. It helps you balance the risk and reward of various investment vehicles, including equity funds, bonds and short-term funds to build an outstanding mix of asset classes based on your age and how close to retirement you are.

These funds help make retirement investing simple by choosing a balanced mix of assets and asset allocations that are ideal based on your age and retirement goals.

You won’t have to worry about staying on top of market shifts or checking in on your investments frequently because the fund handles that for you. You don’t have to change your strategy every few years as you get closer to retirement because your risk tolerance will adjust automatically based on the retirement year you selected for your fund.

How Do Target Date Funds Work?

Target date funds help manage your investment portfolio with a set balance of U.S. equity funds, global equity funds, bond funds and short-term funds. The percent of funds invested in each investment type adjusts as you grow closer to retirement to go from aggressive growth to conservative protection so your money is ready when you are.

For example, when you are young and just starting in your career, the fund might include 90% investment in domestic and global equity funds. But as you near retirement age, those investments might make up only 30% of the portfolio to protect hard-earned savings while bonds and short-term funds make up the other 70%.

Ideally, you want to see your money continue to be invested in equity funds through the first several years of retirement because your money needs to keep growing even once you retire. That way, you have living expenses for a few decades to enjoy a comfortable life. The funds should not switch solely to bonds until at least 10 years into retirement. But some target date funds don’t switch to bonds and short-term investments exclusively until 20 years into retirement.

How to Choose a Target Date Retirement Fund

When you’re ready to choose a target date retirement fund, follow these tips for making the best choice based on your unique circumstances.

• Select your target date: the first step in choosing the best target date retirement fund is to select your retirement date. If you’re just starting in your career and in your early 20s, select a fund with a target date of approximately 40 years in the future. But if you’ve recently moved jobs and you’re in the middle of your career around your early 40s and need to make new investment choices, go with a plan that’s 20-25 years in the future. Consider how much you need to retire and ensure you’re contributing adequately to ensure a comfortable retirement. Or if you plan to retire early, keep up with your contributions and gain good returns to make that a reality.
• Consider your risk tolerance: each fund handles risk differently. Consider how much risk you can assume with your investment. If you have a pension, qualify for large Social Security payments or have a well-established account elsewhere and feel those are going well for you, consider going with a more aggressive investment strategy. Then just check in on that aggressive strategy regularly to monitor its performance.
• Review the fund’s prospectus: you want to determine how the fund’s asset allocation will change over time and whether it will carry you to retirement or through retirement. Ideally, you want it to carry you for at least 10 years into retirement to ensure your money continues to work for you.
• Review auto-enrollment from employers: when you get started with a new retirement plan, your employer might automatically enroll you in a target fund. However, you should still read the details of the fund to decide whether to keep your money there or not. Just because that’s where you auto-enroll does not mean it is the best option for you.

Pros and Cons of Target Date Funds

As you work to build your retirement investment strategy, consider these pros and cons of target date funds provide.

Pros

• Good for young workers: when you get your first retirement plan investment overview, all the numbers and information will likely feel daunting. Using a retirement fund index allows you to allocate funds to 90% stocks with a low expense ratio to grow your savings aggressively while you’re young.
• A simple way to diversify investments: you don’t have to decide how your risk tolerance translates to an investment mix. Instead, the fund does that for you, placing your money in equity funds, bonds and short-term investments for best results.
• Automatic rebalancing: don’t worry about checking your investments and rebalancing them regularly. The fund handles that for you automatically to allow you to be more hands-off in your approach.

Cons

• May be too broad: how a person making a modest income invests their retirement savings should differ from that of a person making a generous income. But these funds don’t adjust based on annual household income or how much you’re contributing each year, which could make them too broad depending on your needs.
• Investments might be too conservative: when choosing investments yourself and building a portfolio, you could see greater returns than what a target date fund earns.
• Some funds include large fees: watch out for funds with high expense ratios that eat into your earnings. Choose your fund carefully to avoid paying these fees.

Earn Solid Returns While Managing Risk Based on Age

You have so much to think about in your day-to-day life. Constantly rebalancing your retirement portfolio likely isn’t realistic. Earn solid returns in your account to help it grow while managing your risk depending on how close you are to retirement to ensure you’re balancing risk with reward.

Frequently Asked Questions