What is a target date fund?

A target date fund is a mutual fund or exchange-traded fund (ETF) that is designed to automatically adjust its asset allocation over time based on a specific target retirement date set by the investor. This type of fund typically has a mix of stocks, bonds, and other investments that becomes more conservative as the target date approaches.

For example, if an investor is planning to retire in 2040, they would invest in a target date fund labeled for that year. Initially, the fund may have a higher percentage of equities to capitalize on growth, but as the target date nears, the fund gradually reallocates to a safer mix of assets, such as bonds, to preserve capital and reduce risk as retirement approaches. This approach allows investors to benefit from an investment strategy that adjusts over time without requiring them to actively manage the changes themselves.

This automated strategy is particularly attractive for retirement planning, as it aligns the investment's risk profile with the investor's time horizon, helping to ensure that funds are available and safeguarded as the investor nears retirement.