Should You be Using Target Date Funds for Retirement?

Target date retirement funds seem to be getting a lot of press these days and as such, investors are pouring billions of dollars into them.

The question is, should they?

What are target date funds? It's a mutual fund seeking to grow assets for a future target date. For example, someone who wants to retire in 12 years might use a 2030 target date fund.

Most investors would agree that assets are "supposed to" be managed in the fund to maximize growth and minimize loss in a manner that is prudent given the years left until the target is reached. A target date fund's risk tolerance is "supposed to" become more conservative through reallocation as it approaches its target date.

Target date funds are essentially asset allocated funds. Depending on the age of the investor and the target date, the mix might be 60/40, 70/30, 50/50, etc. stocks to bonds.

Target date funds are the epitome of K-I-S-S (Keep It Super Simple).

Target date funds are pure genius from a marketing perspective. The sales pitch is...investor, if you give us your money and keep it with us for 15, 20, 35+ years, we will:

  1. Help you achieve your retirement goal
  2. Generate good returns in up years and provide some protection in down years             
  3. Reallocate to lessen your risk of loss as you age.

And if the client uses Vanguard's target date funds, the cost per year will be very small.

But will target date funds fulfill as promised? We don't think so.

Using examples is usually the best way to get the point across in newsletters. Let's look at Vanguard's target date funds ending in 2030, 2025, and 2020. That means the current age of each investor would retire in 12, 7, and 2 years respectively. I chose these examples to show how risky each fund is and why we do NOT find them suitable investments.

We used our OnPointe Investment Risk program to run the numbers to score each mutual fund and calculate the maximum drawdown risk going back to the last crash as well as the compound annual growth rate (CAGR) going back 10 years.


What is wrong with these numbers?

Keep in mind that the three examples we are using are clients who are 53, 58, and 63 years old, if their target retirement age is 65. To us, this means these clients should NOT be in an investment mix that will risk a big stock market loss.

All three have a risk score on the OnPointe 1-100 scale of more than 50. Click here to find your risk score.

The maximum drawdown is huge for all three (-38%, -42%, -46%).

The compound annual growth rate (CAGR) over time is not suitable for the risk taken.

A classic 60/40 mix of stock/bond yielded a higher CAGR and had lower drawdown risk.

While the S&P 500 had slightly more risk than two of the target date funds, at least it generates a much higher CAGR.

If you just looked at the numbers above would you use a target date fund for your retirement?

We wouldn't. As the numbers indicate, target date funds have not performed well historically and, in our opinion, have far too much risk for the returns generated.

If you would like to discuss your retirement goals and the best way to reach those goals, please feel free to email us at or give us a call 424-288-4254.

"There's always an element of risk. No one has a crystal ball. OK, I have one, but no one knows how it works."

"There's always an element of risk. No one has a crystal ball. OK, I have one, but no one knows how it works."