Target-Date Funds for Retirement Income: A Closer Look

Few investors have as vested an interest in generating a reliable income stream as those in or approaching retirement. Target-date retirement funds, meant for those saving and spending in retirement, approach the problem in many ways. While some target-date asset allocators continually change the asset mix well into retirement (these are known as “through” target-date funds), others all but freeze allocations at the retirement year (“to” target-date funds). The exhibit below illustrates these approaches.

Target-Date Funds Take Different Asset-Allocation Glide Paths to Make Income

As workers approach their target retirement year, target-date funds take a variety of approaches to asset allocation to generate income for retirees.

Target-date offerings in the Morningstar 500—a compilation of the industry’s best and most notable funds from our Morningstar FundInvestor newsletter—are dominated by the former, such as the A shares of the American Funds Target Date Retirement series, which has a Morningstar Medalist Rating of Silver. This series continues changing its asset allocation three decades into a savers’ retirement spend-down years. Target-date funds generally do so by moving out of stocks and into income-producing bonds.

American Funds stands out by also directing more money into funds that emphasize equity dividend payers, like Silver-rated American Funds Capital Income Builder CAIBX. The effect of this asset-mix movement is clear in the series’ yield: American Funds 2015 Target Date Retirement’s AABTX (for those already retired for the past 10 years) 12-month yield at the end of 2024 stood at 2.9%, compared with 2025 Target Date Retirement’s AADTX 2.5% and 2035 Target Date Retirement’s AAFTX 1.7%.

The A shares of the Neutral-rated JPMorgan SmartRetirement target-date series stand as the Morningstar 500 list’s lone “to” target-date series. At retirement, the series’ asset allocation halts its roll-down, ending with a strategic allocation to equities of 40% that is somewhat lower than the industry average of 44%. The investment team arrived at this point via research rooted in the behavior of retirement plan participants, including the insight that retiree spending is most volatile during the early years of retirement. A lower equity allocation is prudent when spending needs are less predictable. Doing so helps mitigate sequence-of-return risk and the odds that investors are selling assets into down markets and limiting their potential for recovery.

A higher strategic bond weighting has also produced a greater yield. JPMorgan SmartRetirement 2025’s JNSAX 3.4% yield as of December 2024 came out ahead of the target-date 2025 Morningstar Category average of 2.9%.

The Silver-rated Vanguard Target Retirement series takes the middle ground among its peers, stopping its asset-allocation roll-down when it reaches 10 years past the retirement date. At that landing point, its strategic equity allocation of 30% falls under the typical peer’s 36% allocation. At retirement, though, the series’ 50% equity allocation is higher than the industry average of 44%.

This higher initial allocation stems from the investment team’s goal to help investors replace a hefty 80% of income in retirement (inclusive of Social Security benefits). Taking more stock market risk helps combat the possibility of investors outliving their savings, though it also leaves them more vulnerable to sudden market drops.

A greater allocation to equities has not notably diminished the series’ income, though, and Vanguard Target Retirement 2025’s VTTVX 2.8% yield was close to its category average. The series’ exclusive use of index-based underlying funds drove this, as actively managed strategies typically have shorter durations that correlate with lower yields.

This article first appeared in the December 2024 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.