What Happens When a Target Date Fund Reaches Maturity? – Technologist

Inside a retirement account, a target date fund is an excellent way to save for retirement. Just pick the year closest to when you want to retire and put all your money into that target date fund, money expert Clark Howard advises.

“The easy button for retirement,” as Clark says, reallocates your portfolio slowly over time. The further you are from retirement, the heavier you’ll be invested in equities (stocks, funds). The closer you are to retirement, the heavier you’ll be invested in fixed income (typically bonds).

But what’s so special about the year listed on your target date fund? What happens then?

What Happens When the Date in My Target Date Fund Arrives?

What should I do once my target date fund reaches maturity?

That’s what a Clark Howard listener recently asked.

Asked Sue in Wisconsin: “I took your advice many years ago and opened a 2025 Target Retirement Roth IRA. I am very glad I did (thank you). But now that 2025 is just around the corner, I’m not sure what happens to the fund.

“I don’t need it immediately. Do I leave it, move it or change the asset mix? I’m thankful for all your great advice over the years!”

Target date funds typically are spread out every five years regardless of the investment company. Vanguard, Fidelity and Schwab all have 2025, 2030, 2035 and 2040 target date funds. And their options continue from there.

Each company structures its target date funds differently. Some are more conservative, divesting of equities much earlier and to a greater degree. Some are aggressive, keeping investors invested in a healthy number of equities far past the target date.

Clark’s Explanation and Advice for Sue

Clark called it “wonderful” that Sue has been saving and investing in her future via this target retirement fund for so long.

Now that her fund’s target date is approaching in a few months, she shouldn’t expect the fund to sell every possible investment and hold her full position in cash. Nor should she expect the fund to get rid of every stock share.

“When we hit next year, it doesn’t suddenly all go into bunker mode. There will continue to be a need in that fund for years to come to have meaningful exposure to the stock market,” Clark says.

“It goes into a retiree mode in 2025 where prior to that it’s more build toward a growing mode. And in retiree mode, the thinking is the portfolio has to be more defensive. So that in down years for the market, you go down a lot less than the market goes down. And in up years, you’ll go up less.”

So there’s nothing wrong with Sue leaving her funds inside the 2025 target date fund for years to come.

Sue can delve deeper into her target date fund and determine whether it’s more conservative or aggressive about winding down its risk. She also can move the money to a 2030 or 2035 target retirement fund, or invest in a broad stock market index fund outside of the target date fund if she wants more exposure to the market.

Whether she’ll continue to make income beyond 2025 also matters. The target date is designed to be more or less the last day you make income. If you’re earning money, that should cover you short-term when the market hits a decline. But when you’re only in withdrawal mode, a downturn in the market can crush you. Because you’re having to sell at a market low point.

What’s a Glide Path?

The shift in portfolio allocation inside a target date fund is more like a dimmer switch than an on-off switch. It’s gentle and slow-moving.

Slowly removing risk from your portfolio as you get closer to retirement is called a “glide path.”

There are “to” target date funds and “through” target date funds.

“To” funds glide into their final, most conservative form exactly on the target date (2035 for a “2035” fund). Those are the most conservative.

“Through” funds extend their glide path to a future year that’s past, and sometimes well past, your target date.

Whenever you reach this final allocation, target date funds almost always still hold some of your money in the stock market. That way inflation doesn’t shred your retirement savings.

Clark’s favorite target date funds, he says, at the target date, still allocate “maybe 30 to 40% of the money exposed to the stock market.”

Final Thoughts

Target date funds list a specific year. But that year is meant to be guidance for when you stop making income through a career.

The listed date isn’t some self-destruct countdown, Inspector Gadget style. Most target retirement funds will continue to shift allocations for many years.

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