Target date funds are designed to make investing for retirement as easy as possible. Generally speaking, target date funds are built around an expected future retirement date, which is most often included in the name of the fund, such as the Vanguard Target Retirement 2060 Fund (VTTSX).
This objective defines the important differences between these two types of funds. First, target date funds designed for retirement in 20 years or more typically have an asset allocation of 90% stocks and 10% bonds. While this aggressive allocation is ideal for long-term investors, it is not suitable for retirees.
Second, target date funds change their allocation as the target date approaches. These changes shift the allocation further to fixed income to reduce portfolio volatility as holders move closer to retirement. These changes in asset allocation are known as the downward trajectory of a fund. Retirement income funds do not change the allocation of assets over time.
Target date funds are designed to provide a one-stop fund solution for retirement planning. These funds invest in national and international stocks and bonds in a single fund. In contrast, retirement income funds are not necessarily designed to be a retiree’s only investment choice. Some on our list could be used for this purpose, like the Wellington Fund, but that is the exception, not the norm.
Finally, it’s important to understand that some target date funds are designed to provide income in retirement. The Vanguard Target Retirement Income Fund (VTINX) is one example. We have excluded these funds from this list for several reasons. As noted above, target date funds tend to be viewed as a one-time fund solution. But they may be ill-suited for such purposes given their very low allocation to equities.
The author (s) did not hold any position in the titles discussed in the post at the time of original publication.