Target-date funds are everywhere—in your 401(k), in many IRAs. For millions of Americans, they've become the default choice because they feel simple, responsible, and hands-off.

In nearly 20 years of helping people retire with confidence, I've noticed something important: most people don't question target-date funds until retirement is already close or already here. That's when the real question starts to matter: are target-date funds a lifesaver for retirement, or could they quietly become a liability once you stop working?

The Question Retirees Ask Too Late

During your working years, your portfolio's role is growth. You're contributing regularly, reinvesting dividends, and letting time do most of the work. But after you stop working, that role shifts. Your portfolio now must fund your life consistently through inflation, market downturns, rising healthcare costs, and unexpected expenses.

To decide whether target-date funds still make sense in retirement, we need to understand how they're built, why they often work extremely well before retirement, where the challenges show up after retirement, and how to tell whether your fund is aligned with your actual retirement needs.

How Target-Date Funds Actually Work

At its core, a target-date fund is a pre-built, automatically adjusting portfolio. You select a year—usually close to when you expect to retire—and the fund handles two major responsibilities:

·   Provides broad diversification across U.S. and international stocks and bonds

·   Gradually reduces risk over time through a built-in glide path

While you're still working, this structure can be extremely effective. It simplifies decision-making, enforces diversification, rebalances automatically, and helps investors stay consistent and avoid emotional mistakes during market swings. For many people, that alone makes target-date funds a strong choice during the accumulation phase.

Why Retirement Changes Everything

The challenge is that retirement introduces a completely different set of priorities. Once contributions stop, withdrawals begin. Volatility matters much more. Timing matters. Cash flow matters. A portfolio that was ideal for accumulation may not be optimized for distributions.

Another point that often surprises retirees: target-date funds are not standardized.Two funds with the exact same target year can hold very different allocations depending on the provider.

The Glide Path Problem Most People Miss

Some glide paths continue reducing risk for many years after retirement. Others level off or even increase equity exposure later on. Those differences can lead to very different experiences during extended market downturns, especially once withdrawals are involved.

More importantly, glide paths are built around averages. They're designed for a hypothetical investor, not a specific retirement situation. They don't adjust for when you plan to take Social Security, whether you have pension income, how much you need to withdraw each year, or how sensitive you are to market swings.

In retirement, those personal details matter far more than they did before.

Withdrawals, Volatility, and Sequence Risk

This leads to one of the most significant risks retirees face: when you combine withdrawals with market volatility.

When markets decline during working years, you're still adding money. Time and future contributions help smooth out the impact. But in retirement, withdrawals change the dynamic. Market declines paired with ongoing withdrawals can permanently reduce the portfolio's ability to recover, especially if assets are sold during a downturn.

Taxes, Rebalancing, and Hidden Drawdowns

Tax efficiency becomes far more important in retirement—and this is where target-date funds can create unexpected issues.

Because they rebalance internally, target-date funds can generate capital gains distributions when held in taxable accounts—even if you never sell a share. In 2023, many funds distributed 2–8% of their net asset value in capital gains, resulting in significant, uncontrollable taxable income.

Additionally, because stocks and bonds are bundled together in one fund, retirees lose the ability to:

·     place bonds in tax-deferred accounts

·     hold stocks in taxable accounts for loss harvesting

·     control which assets are sold for income

That lack of control can increase taxes and reduce flexibility at exactly the wrong time.

The Bucket Strategy Advantage

Effective retirement planning often separates money by purpose:

·     cash for short-term spending

·     bonds for mid-term stability

·     stocks for long-term growth

This “bucket” approach allows retirees to avoid selling growth assets during market downturns. With a single target-date fund, withdrawals typically come from the entire portfolio, forcing sales of both stocks and bonds regardless of market conditions.

During sharp declines—like in early 2020—retirees using a bucket strategy could spend from cash while markets recovered. Those relying solely on target-date funds often locked in losses through forced selling.

When Target-Date Funds Do—and Don't—Make Sense

Finally, target-date funds don't coordinate with the broader retirement picture. They manage asset allocations, but they don't adapt to withdrawal strategies, tax planning, Social Security decisions, required minimum distributions, orMedicare premium thresholds. They're investment tools, not complete retirement income systems.

So, are target-date funds bad for retirement? No. They can be effective tools when used appropriately.

The real distinction: target-date funds are designed to manage investments effectively. They're not designed to manage retirement income on their own.

Retirees with modest withdrawal needs, strong guaranteed income sources, or a preference for simplicity can still find them valuable. According to Morningstar research, retirees who have at least 60% of their expenses covered by Social Security and pensions can often maintain target-date funds successfully because the guaranteed income provides a buffer against sequence risk.

But if you're relying on your portfolio for 70% or more of your retirement income—especially if you're retiring before age 70—the limitations become more pronounced.

They can also work well when paired with a dedicated cash reserve or used specifically as a long-term growth component within a broader plan.

Where issues arise is when a target-date fund is expected to do everything—growth, income, volatility management, and tax efficiency—by itself. That's not going to happen.

The Bottom Line

Target-date funds are excellent for building wealth, but they're not automatically complete distribution strategies.

The most important takeaway: simplicity is powerful, but only when it fits the stage of life you're in. Target-date funds shine during the accumulation phase.But once retirement begins and your portfolio becomes your paycheck, your needs change.

At that point, customization, cash flow planning, and flexibility often matter more than automation alone.

If you want to know whether your target-date fund is supporting your retirement or quietly increasing your risk, that evaluation is worth doing before market stress forces the issue.

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