Target-date funds are designed to make investing for retirement as simple as possible. Generally speaking, target-date funds are constructed around a planned future retirement date, which is most often included in the name of the fund, like 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 20 or more years from now typically have a 90% stock and 10% bond asset allocation. While this aggressive allocation is ideal for long-term investors, it’s not well suited for retirees.
Second, target date funds change their allocation as the target date approaches. These changes shift the allocation more towards fixed income to reduce the volatility of the portfolio as holders get closer to retirement. These changes in asset allocation are known as a fund’s glide path. Retirement income funds do not change the asset allocation over time.
Target date funds are designed to offer a single fund solution for retirement planning. These funds invest in domestic and international stocks and bonds in one fund. In contrast, retirement income funds are not necessarily designed to be a retiree’s sole investment choice. Some on our list might serve that purpose, such as the Wellington fund, but that’s 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 excluded such funds from this list for a couple of reasons. As noted above, target date funds tend to be viewed as a one-fund solution. But they may be poorly suited for such purposes given their very low allocation to stocks.
The author(s) held no positions in the securities discussed in the post at the original time of publication.