Why Is My Target Date Fund Losing Money?
Your "set it and forget it" investment is down, and you're wondering what went wrong. Here's why target date funds can drop and when you might need to make changes.
Key Takeaways
- 1Target date funds are NOT guaranteed - they hold stocks and bonds that fluctuate
- 2TDFs can lose 20-40% in severe market downturns even near retirement
- 3The "glide path" gradually reduces stocks but maintains significant equity exposure
- 4Losses in TDFs usually recover as markets recover
- 5Consider whether your personal risk tolerance matches your TDF's allocation
Why Your Target Date Fund Is Losing Money
Target date funds are NOT guaranteed investments. They can lose money for several reasons:
- Stock market decline: Even near retirement, TDFs hold 30-55% stocks
- Bond market decline: Rising interest rates hurt bond values (2022 saw this)
- Correlation breakdown: In crisis, stocks AND bonds can fall together
- International exposure: Currency and foreign market declines add volatility
- No "floor": Unlike annuities or CDs, TDFs have no guaranteed minimum value
2022 Example
In 2022, a typical 2025 Target Date Fund lost 12-15% because BOTH stocks and bonds declined. Retirees who thought they were "safe" were surprised. This is normal TDF behavior in unusual markets.
Understanding the Glide Path
Target date funds gradually shift from stocks to bonds as you approach retirement - this is called the "glide path." But many people misunderstand how it works:
- A 2025 TDF does NOT become 100% safe in 2025
- Most TDFs still hold 30-55% stocks AT the target date
- "To" glide path: Reaches most conservative allocation at target date
- "Through" glide path: Continues shifting for 10-20 years after target date
- Your TDF assumes you will spend retirement money over 30 years, not all at once
| Target Date | Typical Stock Allocation | Bond Allocation | Max Loss in Crash |
|---|---|---|---|
| 2045+ | 85-90% | 10-15% | 40-50% |
| 2035 | 70-80% | 20-30% | 30-40% |
| 2030 | 55-70% | 30-45% | 25-35% |
| 2025 | 40-55% | 45-60% | 15-25% |
| Income/Retired | 30-45% | 55-70% | 12-20% |
TDF Allocations Vary by Provider
Not all target date funds are created equal. The same target date can have very different risk levels:
- Vanguard and T. Rowe Price tend to be more aggressive (more stocks)
- Fidelity and Schwab tend to be more conservative
- "Through" funds stay riskier longer into retirement
- Same target date can mean 15% different stock exposure depending on provider
| Provider | 2030 Fund Stocks | 2030 Fund Bonds | Style |
|---|---|---|---|
| Vanguard Target Retirement | 65% | 35% | Through |
| Fidelity Freedom | 60% | 40% | To |
| T. Rowe Price Retirement | 70% | 30% | Through |
| Schwab Target Date | 55% | 45% | To |
| BlackRock LifePath | 58% | 42% | To |
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When You Might Need to Switch
Sometimes switching from your target date fund makes sense:
- Risk mismatch: If TDF losses keep you up at night, your risk tolerance may be lower than its allocation
- Earlier retirement: If retiring before target date, consider more conservative options
- Different timeline: You may need money sooner (or later) than the target assumes
- High fees: Some TDFs charge 0.5-1%+; index TDFs can be 0.10%
- Want control: You prefer to manage your own allocation
- Adding gold: TDFs rarely include precious metals for diversification
Do Not Switch in Panic
The worst time to switch funds is during a market crash. Selling when your TDF is down locks in losses. If you want to change, wait for recovery or implement gradually.
Alternatives to Target Date Funds
If your TDF isn't right for you, consider these options:
- DIY three-fund portfolio: Total stock, total bond, international - you control percentages
- More conservative TDF: Pick a target date 5-10 years earlier for less risk
- Balanced fund: Fixed 60/40 or 50/50 allocation that doesn't change
- Add stable value fund: Available in many 401ks, very low volatility
- Gold allocation: Add physical gold IRA for crisis protection
- Bucket strategy: Separate buckets for near-term (safe) and long-term (growth)
TDFs Are Not Guaranteed
Many investors choose target date funds thinking they are "safe" or "guaranteed." They are neither. A TDF with a 2025 target date could lose 15-20% in a severe market decline. If you cannot tolerate this, you may need a more conservative approach.
Adding True Diversification with Gold
Gold is the ultimate safe haven. Physical gold in an IRA has no counterparty risk - it is yours regardless of what happens to banks or government. Target date funds typically lack precious metals exposure:
- Gold often rises when stocks and bonds fall - true diversification
- Physical gold cannot be devalued by central bank policy
- Provides stability that paper assets cannot offer
- No counterparty risk - you own the metal directly
- Consider rolling a portion of 401k to Gold IRA for balance
Frequently Asked Questions
1Should I switch to a more conservative target date fund?
If your current TDF's volatility is causing you stress, switching to a more conservative fund (earlier target date) may be appropriate. However, do not switch in the middle of a market decline - that locks in losses. Wait for recovery or switch gradually.
2How much can a target date fund lose?
In severe market conditions, even a conservative TDF near retirement can lose 15-25%. A TDF with a distant target date (2045+) can lose 40-50% in a crash like 2008. These are temporary losses if you stay invested, but they are possible.
3Why does my TDF still have stocks near retirement?
TDFs assume you will spend your retirement savings over 20-30 years. If it were all in bonds, you would lose purchasing power to inflation and might outlive your money. The stocks are there for long-term growth during retirement, not just before it.
4Are target date funds a good choice?
TDFs are excellent for hands-off investors who want automatic rebalancing and age-appropriate allocation. They are not ideal for those who want control, have unusual timelines, or cannot tolerate volatility. Most investors do fine with TDFs if expectations are realistic.
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