Target date funds are one of the most popular investment options inside a 401(k), but are they actually the right choice for your retirement plan? In this episode of the Wise Money Show, we break down how target date funds work, when they make sense, and when building your own diversified portfolio may be the smarter move. We also answer a fan question about choosing a later retirement date to take on more risk, and whether that strategy really works.
Season 11, Episode 25
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This information is for general financial education and is not intended to provide specific investment advice or recommendations. All investing and investment strategies involve risk, including the potential loss of principal. Asset allocation & diversification do not ensure a profit or prevent a loss in a declining market. Past performance is not a guarantee of future results.
Why Your Risk Tolerance Matters More Than Your Age in Retirement Investing
When most people choose between different target date funds inside their 401(k), the decision often feels simple: pick the fund closest to your expected retirement year and move on. That convenience is exactly why target date funds have become so popular. As discussed in this episode of the Wise Money Show, they offer an easy, diversified “set it and forget it” approach for investors who may not want to manage investments themselves.
But one small point mentioned during the episode deserves a much deeper look: your actual retirement age may not be the best factor for determining your investment strategy. In many cases, your risk tolerance and long-term financial goals matter far more.
The Problem With Using Age Alone
Most target date funds automatically reduce investment risk as you approach retirement. The assumption is straightforward: younger investors should take more risk, while retirees should become more conservative.
That sounds reasonable at first. However, retirement today often lasts 25 to 35 years or more. If someone retires at age 65, there’s a very good chance their investments still need to grow for decades.
This creates a challenge.
Many investors discover that the target date fund associated with their retirement year becomes too conservative too quickly. That can potentially limit long-term growth and increase the risk of outliving savings later in retirement.
This is one reason some investors intentionally choose a target date fund dated 5 to 10 years beyond their expected retirement date. As mentioned in the episode, doing so may allow you to maintain a slightly more growth-oriented portfolio while still benefiting from diversification and professional management.
Risk Tolerance Is More Than Just “Aggressive” or “Conservative”
One of the biggest misconceptions in retirement planning is that risk tolerance is simply about how comfortable you are with stock market volatility.
In reality, there are several layers to risk tolerance:
- Your emotional comfort with market swings
- Your ability to withstand losses without changing strategy
- Your need for long-term growth
- Your timeline before retirement
- Your income sources during retirement
- Your withdrawal strategy
For example, two people may both retire at age 65, but their investment strategies could look very different.
One retiree may have:
- A large pension
- Strong Social Security income
- Minimal spending needs
- Significant cash reserves
Another retiree may depend heavily on investment withdrawals to maintain their lifestyle.
Even though they are the same age, their appropriate investment allocations may be completely different.
That’s why comprehensive financial planning matters so much more than simply selecting a fund based on a date in its name.
Sequence of Returns Risk Changes Everything
Another important concept tied to this discussion is sequence of returns risk. This refers to the danger of experiencing poor market returns early in retirement while simultaneously withdrawing money from investments.
If your portfolio becomes too conservative too early, inflation may slowly erode your purchasing power over time. But if it remains too aggressive without a proper strategy, major downturns can create stress and force poor financial decisions.
Rather than simply following a generic glidepath inside a target date fund, this is why many CERTIFIED FINANCIAL PLANNER™ professionals focus on balancing:
- Growth potential
- Income needs
- Cash reserves
- Tax strategy
- Withdrawal flexibility
The “Easy Button” Isn’t Always Wrong
It’s important to clarify something: target date funds are not inherently bad.
In fact, for many investors, they are a major improvement over doing nothing at all.
As discussed in the episode, they can work especially well for:
- Younger investors just getting started
- Employees with limited investment options in their 401(k)
- Investors who prefer simplicity
- Individuals unlikely to rebalance investments consistently on their own
The danger comes when investors assume the target date fund is automatically customized for their unique situation.
It isn’t.
A target date fund is built around averages and assumptions. Your financial life probably doesn’t fit the average.
A Better Question to Ask
Instead of asking:
“What target date fund should I pick?”
A more valuable question may be:
“What investment strategy best supports my long-term financial goals?”
That question opens the door to broader planning conversations involving:
- Tax planning
- Retirement income
- Social Security timing
- Roth conversion opportunities
- Emergency reserves
- Estate planning
- Risk management
At Korhorn Financial Group, we often refer to this as integrating all six areas of financial planning into one coordinated strategy.
Because ultimately, your investments should support your financial life, not the other way around.
And sometimes, the wisest investment decision has less to do with your age and more to do with your overall plan.
