MICHAEL KITCES: One key thing to know about target-date funds is that some are designed to invest up to retirement, while others are designed to help you invest through retirement. The differences between a “to-retirement” and a “through-retirement” fund can be significant, though.

    In some cases, ”to” funds and “through” funds will set retirees up for very different allocations at the date of retirement transition (though in fact, there is little consensus overall in the target-date fund industry about exactly what that “optimal” allocation at retirement should be in the first place). The reason has to do with the different time horizons of the funds. “to” funds generally leave portfolios very conservative the moment of retirement transition–in essence, their targeted time horizon is from now until you retire–while “through” funds often have much more aggressive portfolios at retirement and then continue to wind them down throughout retirement (as their intended time horizon is from now until the end of your retirement!).
    The irony of this distinction is not just that “to” funds may require you to reassess your investments in retirement itself–as they’re not really intended to take you through retirement at that point–but that “to” funds may actually leave retirees better prepared for retirement, after all. The reason is that recent research is finding the traditional “through” fund approach–where exposure to stocks stays higher in earlier retirement and drifts downward over time–may actually not be the optimal “glide path” for equities.

    Instead, an approach where stock exposure troughs at the retirement date, and then actually begins to glide slightly higher through retirement, may actually be slightly better (and leaves your portfolio less prone to market disasters at its peak near the retirement transition). Which means a “to” fund that makes your portfolio most conservative as you approach retirement may best set you up for managing your portfolio in retirement.

    As a starting point, though, if you have a target-date fund, and you could be approaching retirement anytime in the next decade, make sure you know whether it’s a “to” fund or a “through” fund, so you understand how the allocations are likely to change as you approach retirement. And if you’re already in retirement, and are still using a target-date fund, it might be a good idea to take a look under the hood and understand what it’s actually doing–or not–now that you are retired!


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