Target date retirement funds work up to a point. Here’s when you may want to reconsider

A retirement-savings option that can be smart at the outset of your career probably needs to be reexamined down the road.

Target-date funds, as they’re called, offer a way to put your savings on autopilot: Holdings gradually shift away from riskier assets like stocks and toward more conservative investments (bonds and, perhaps, cash) as you approach retirement.

While they are designed to be a “set it and forget it” way to save for retirement, these funds may make sense only for a while, depending on your situation. And when you’re nearing retirement, it’s probably worth examining whether you should ditch your target date fund entirely.

“When you’re about 10 years away from retirement, say in your mid-50s, you really need to be taking a holistic view and look at your whole financial picture,” said Certified Financial Planner Chris Mellone, a financial advisor with VLP Financial Advisors in Vienna, Virginia.

“We believe a more customized asset allocation approach is needed for this segment [of investors],” Mellone said.

Roughly $1.8 trillion is invested in target date mutual funds, according to Morningstar. Most 401(k) plans — 98% — include this kind of fund in their lineup, according to Vanguard. And 80% of all 401(k) participants are invested in these funds.

For young investors or those with little investing experience, target-date funds are particularly practical, advisors say, given the asset allocation reflects a long time horizon until retirement (some as much as 95% or more in stocks), and there’s automatic rebalancing and de-risking over time.

That usefulness can change, however.

“The not-so-good thing is that you put it on autopilot for the next 20 years and as it’s getting larger, you’re progressing in your career and life, and you’re getting other assets,” said CFP Charles Sachs, chief investment officer for Kaufman Rossin Wealth in Miami.

“Then the target fund is working in isolation, and that’s the point when you need some coordination,” Sachs said.

For example, say you reach a point where your target date fund is 70% in stocks and 30% in bonds. Also, say you have money in another fund that’s invested solely in stocks or a stock index. Depending on the amount, your stock-bond ratio could be more like 90%-10%, which may not be appropriate for your risk tolerance (generally how well you can stomach market volatility and how long until you need the money).

“When they start adding investments to their total portfolio, that could mean taking on additional risk that they’re not aware of,” said Megan Pacholok, an analyst with Morningstar. “Their allocation is no longer what they thought it was.”

Generally, these funds reach their target year with money still invested in stocks and continue doing so, although some may reduce their equity holdings. For instance, the average 2020 target date fund now has about 46% in bonds, 42% in stocks and the remainder in cash and other investments, according to Morningstar Direct. The average stock-bond mix for 2025 target date funds is 47%-39%.

While some advisors say there’s nothing wrong with continuing to rely on target date funds in retirement, others say there are reasons to reconsider.

For example, if you need to pull money from one during a market pullback, it could mean selling stocks when they’re down — whether you want to or not.

“If you’re taking distributions from a target date fund, you’re taking from both bonds and stocks indiscriminately,” Mellone said. “We’d rather break those pieces apart and see what makes the most sense for funding distributions.”

For instance, if you know you’ll need to generate $100,000 from your retirement savings each year, you can plan to have a certain number of years’ worth of income — say five years, so $500,000 — in cash and bonds, so you aren’t put in the position of selling stocks or other volatile investments in a down market. At the outset of retirement, that can be especially detrimental to the long-term value of your nest egg.

The bottom line is to be sure to reevaluate whether your target date fund still makes sense as your financial life grows more complex or you’re nearing retirement.

“It could be working for you or against you, but you have to track it to know,” Sachs said. “So don’t set and forget it forever.”