Are Target Date Funds Really on Target?

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Michael Walsh CFP® Senior Financial Analyst

Currently there are millions of different investments that people can choose when it comes time for them to create their own unique portfolio. Since financial markets were created, we have seen a multitude of new investments come and go. The important thing to remember is that investments will always be evolving. With the introduction of mutual funds early in the twentieth century, investors now had a way to diversify their holdings and as the old saying goes, “not have all their eggs in one basket.” Looking back, we know those early funds were still subject to market risk and there is no investment that is entirely risk free. In the early 1990s fund companies started introducing the concept of a target date fund that they hoped would revolutionize the way people invest.

Target date funds, also known as glide path funds, shift their allocation over time from higher equity exposure toward larger fixed-income holdings as the fund reaches its maturity. For example, if I were to own a 2035 target date fund in my portfolio, I might have 60% equity and 40% fixed income as my fund allocation. Each year we march toward 2035, the portfolio management team will take equity off the table and invest more in fixed income. So, in 2025 my target date allocation might be 70% fixed income and 30% equities. Today many qualified plans offer target date funds as part of their overall investment menu to participants. Many of these funds are quite good and their investment philosophies and processes are sound. The issue that I have is that many people by default set their target date to the year in which they intend to retire.

As we have seen, with medical advancements and lifestyle changes people have been living increasingly longer. As Harold Evensky points out in his book The New Wealth Management, “65-year old males and females have at least a 50 percent chance of living to 85 or 88 years, respectively, or 8 to 10 years longer than their life expectancy at birth.” Harold goes on to say, “A married couple has a 50% chance that at least one of them will survive until age 91. There is a 25 percent chance that one of them will survive until 96.” These statistics show that individuals or married couples will live a substantial life beyond retirement which they must fund. Using a target date fund that will have an extremely high fixed income position when they turn 65 might not be the best option for a large part of their portfolio. People at that age tend not to want rapid growth in their investments but rather a smoother ride producing returns to sustain their lifestyle. The issue people often forget about is the predator that will attack their cash and fixed-income holdings. This predator is called inflation.

Inflation, also known as purchasing power risk, will increase the price of all goods that we buy on a daily, weekly, monthly, and yearly basis. If your portfolio is not keeping up with inflation each year, you are losing your ability to pay for those consumer goods and maintain your lifestyle. Retirees who depend upon Social Security and their portfolio to sustain their lifestyle need to have some equity allocation in their investments in order to generate returns that will outpace inflation. According to research published by the World Bank Group, a non-profit located in Washington, DC, the United States has on average experienced inflation at 3.85% since 1960. If you have fixed-income positions that are returning 2% when you turn 65 and inflation is over 3%, you might have to restrict your lifestyle in order to stay financially independent.

Having any diversified allocation that is not made up entirely of cash or cash equivalents is always the first line of defense against inflation. While there are many benefits to owning target date funds that offer a glide path for investors, there are also several pitfalls of which people should be aware. To learn more about target date funds or planning for your retirement visit us at and set up an appointment today to speak with an expert.

Feel free to contact Michael Walsh with any questions by phone 305.448.8882 ext. 213 or email:

Evensky, H., Morgan, S., & Robinson, T. (2011). The New Wealth Management. Wiley.

The World Bank. (2016, June 1). Data: Inflation, consumer prices (annual %).  Retrieved from