A Target-Date Fund, particularly in the context of the Individual Retirement Account (IRA) industry, is a mutual fund or exchange-traded fund (ETF) designed to automatically adjust its asset allocation with a mix of stocks, bonds, and other investments as it approaches a specified future date, known as the “target date.” The target date is often linked to the anticipated retirement year of the investor.
As the target date approaches, the fund’s investment strategy becomes more conservative, gradually shifting from higher-risk, growth-oriented assets (like stocks) to lower-risk, income-oriented assets (like bonds). This transition is based on the principle that investors should take on less risk as they get closer to needing the money for retirement.
Target-Date Funds are popular in retirement plans like IRAs because they offer a simplified investment strategy. Investors select a fund with a target date close to their expected retirement year and the fund managers handle the rest, adjusting the portfolio over time. This hands-off approach can be particularly appealing for individuals who prefer not to actively manage their retirement investments.