Target-date mutual funds relieve some of the work of rebalancing as investors age

A target-date fund is a mutual fund (or exchange-traded fund) that rebalances and reallocates assets as you get closer to retirement, typically shifting the majority of assets from riskier investments such as stocks to more conservative — or fixed-income — investments such as bonds and cash.

The fund is designed as a one-stop investment shop with a diversified set of asset classes. Target-date funds are gaining in popularity: At the end of 2020, they held $2.8 trillion of assets, according to Morningstar.

How target-date funds work

They aim to alleviate the continuing task of a successful investment strategy: rebalancing and optimizing asset allocations. Some studies have shown that up to 90% of an investor's return depends on how money is divided between various asset classes, from equities such as domestic and global stocks, to fixed-income investments such as bonds and cash. Target-date funds offer investors the convenience of automatically allocating assets in the fund from day one.

Advantages of target-date funds

A target-date fund eliminates the need to constantly monitor and adjust your portfolio and reduces the stress associated with financial planning by the time you get to retirement. The fund has a defined trajectory when allocating assets in the portfolio.

If your time horizon changes, you can switch to a more applicable fund.

Saving for retirement requires spending some money. Target-date funds all have expense ratios, and it's important to compare these before selecting one.

Target-date funds are investments, and all investments have the potential to lose value. It's a reality of saving for retirement: You need to accept some degree of risk when investing for retirement.

Are target-date funds a good investment?

A target-date fund can be a smart and simple way to spread your money across investments that match your age and retirement-goal needs. But not all funds of the same target date are created equal.

Keep in mind that the target date represents the beginning of another chapter in your life. The fund sets you up for retirement, but you will also need a plan for putting your money to work after you leave the workforce. At that point, consider keeping some of the money in the fund while allocating some cash toward other investments to earn regular income from your savings.