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WalletPrep worksheet · Investing

What is a target-date fund, and should you use one?

Name ____________________ Date __________

Key ideas

  1. The year in the name is your retirement. Pick the fund dated closest to when you plan to stop working, usually around age 65.
  2. It shifts from stocks to bonds over time. Early on it holds mostly stocks. As the date nears, it moves toward bonds. That schedule is called the glide path.
  3. It works best as your only fund. Adding other funds in the same account changes the mix it was built to manage for you.

Vocabulary

Target-date fund
One fund that holds a mix of stocks and bonds and slowly shifts toward bonds as the year in its name gets closer.
Stock
A small piece of ownership in a company. Its price rises and falls with how investors value the business.
Bond
A loan you make to a government or company. It pays you interest and returns your money on a set date, called the maturity date.
401(k)
A retirement savings plan offered through an employer. Money comes straight from your paycheck, often with an employer match.
Rebalancing
Moving your investments back to the mix of stocks, bonds and cash you chose, after market moves have pushed it off target.
Glide path
A target-date fund's schedule for shifting from mostly stocks toward bonds as its target date approaches.

Work it out

Riley, 30, has $12,000 in a target-date fund that holds 90% stocks and 10% bonds. To be safe, Riley also buys $8,000 of a US stock index fund in the same 401(k).

  1. Target-date fund
  2. Bonds inside it (10%)
  3. Stocks inside it (90%)
  4. Separate stock fund
  5. Total in stocks
  6. Stocks as a share of $20,000

Check yourself

  1. What does the year in a target-date fund's name usually mean?

    • A. The year the fund was started
    • B. The year you expect to retire or need the money
    • C. The year the fund promises to double

  2. You have $10,000 in a target-date fund that is 80% stocks, plus $5,000 in a stock fund. What share of your $15,000 is in stocks?

    • A. 80%
    • B. 87%
    • C. 53%
    • D. 90%

  3. What is a fund's glide path?

    • A. Its fee schedule
    • B. Its list of top holdings
    • C. Its schedule for shifting from stocks toward bonds over time
    • D. Its minimum investment

Your turn

Log in to your 401(k) or IRA and check whether you own a target-date fund. Note its year, its expense ratio and its current stock percentage. If you also own other funds in that account, add up your total stock share.

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Answer key

What is a target-date fund, and should you use one?

Work it out

  1. Target-date fund$12,000
  2. Bonds inside it (10%)− $1,200
  3. Stocks inside it (90%)= $10,800
  4. Separate stock fund$8,000
  5. Total in stocks= $18,800
  6. Stocks as a share of $20,00094%
  1. Inside the target-date fund, $12,000 × 10% = $1,200 is bonds and $12,000 × 90% = $10,800 is stocks.
  2. Adding the stock fund makes $10,800 + $8,000 = $18,800 in stocks out of $12,000 + $8,000 = $20,000.
  3. $18,800 ÷ $20,000 = 94% stocks, more than the fund chose. The fund can't rebalance money it doesn't hold, so Riley moves the $8,000 into the target-date fund.

Check yourself

  1. B. The year you expect to retire or need the money The target date is roughly when you plan to retire. The fund becomes more cautious as that year approaches.
  2. B. 87% $10,000 × 80% = $8,000, plus $5,000 = $13,000 in stocks. $13,000 ÷ $15,000 = about 87%.
  3. C. Its schedule for shifting from stocks toward bonds over time The glide path sets how the stock and bond mix changes as the target date gets closer, and sometimes after it.