Why Retirees May Need to Rethink Target-Date Funds

Target-date funds have long been marketed as a hands-off solution for retirement savers, automatically shifting toward more conservative allocations as investors approach a selected retirement year. But financial experts increasingly caution that these funds are not designed to address the full range of challenges retirees actually encounter once they stop working.

The core limitation is structural. Target-date funds are built primarily around accumulation — growing assets over time — rather than the decumulation phase, when retirees must draw down savings strategically to cover living expenses, healthcare costs, and other financial obligations that vary widely from person to person.

Read more Ages 60 to 63: A Critical Window for Retirement Tax and Healthcare Planning →

Retirees often grapple with decisions that a one-size-fits-all fund cannot accommodate, including when to claim Social Security benefits, how to manage required minimum distributions, and how to sequence withdrawals across taxable and tax-advantaged accounts to minimize lifetime tax burdens. A target-date fund holds no mechanism to optimize any of these choices.

Longevity risk adds another layer of complexity. A retiree who lives into their 90s faces a dramatically different financial picture than one who retires and spends fewer years drawing on savings. Static glide paths embedded in target-date funds do not adapt to individual health outlooks, spending patterns, or changing market conditions the way a customized retirement income strategy can.

Financial planners generally suggest that investors approaching or entering retirement review whether a target-date fund remains appropriate for their full portfolio, or whether a more tailored allocation — potentially including annuities, dividend-focused funds, or actively managed income strategies — better matches their specific retirement income needs. Continue reading at MarketWatch.com