When it comes to investing for retirement, target-date funds (also called lifestyle funds) promise a neat, no-fuss solution. You simply pick a fund aligned with your intended retirement year – say 2035 or 2045 – and the fund takes care of the rest, automatically adjusting its mix of stocks, bonds and whatever else over time.
But while target-date funds can offer convenience, there are real questions around whether they provide the best results for Irish savers throughout their pension journey. Target-date funds are supposed to come into their own as you approach retirement: yet that’s when they pose the greatest risk.
Here are five reasons why target-date funds deserve some scrutiny before you tick the box.
1. Target-date funds are one-size fits all
Target-date funds work by making an assumption around when you’ll want to draw you’re your pension. Based on that date, they automatically shift your money away from growth-oriented assets like equities into more conservative assets like bonds as you approach retirement.
That will suit some people – but not all. Everyone’s retirement plan is different – particularly as our careers progress. Some of us plan to retire at 50, others at 75. Some want to draw down a lump sum to buy a campervan; others need their pension to deliver income for 30 years.
In short, these funds don’t know you. They don’t take into account your personal circumstances, other savings and pensions, debts, state pension entitlements, or your spouse’s financial situation.
Few people draw down their entire pension on their 65th birthday.
That means the glidepath these funds follow – the shift from growth to safety – can be poorly aligned with your actual needs.
2. Target-date funds often become too conservative, too soon
One of the most common criticisms is that target-date funds become overly cautious as retirement nears.
They often assume that stable but low-growth investments will be acceptable to you from your mid-fifties onwards.
The theory is sound: as you get older, your money should be better protected against setbacks from which it can’t recover.
But here’s the problem: retirement isn’t the finish line. It’s the starting line for a new financial phase that could last 20, 30 or 40 years. By becoming overly conservative too early, these funds may miss out on the growth you still need to fund a long retirement.
In fact, fund managers in Ireland have begun to react to this objection. For example, last year New Ireland adjusted its approach by starting to move from higher-risk assets to lower-risk assets 10 years from customers’ planned retirement dates. Previously it was 15 years.
3. Your pension plans continue beyond 65
In fact, in many cases, the most important investment period isn’t just before retirement – it’s the first ten years after you retire. That’s when your pot is typically at its largest and most exposed to inflation, drawdowns, and market movements.
If your fund has already shifted heavily into bonds and cash by that point, you’re de-risking your pension before you stop needing it to grow.
Let’s say your fund assumes you’ll stop working and draw down your pension from 65. What if you continue working part-time? What about the fact that you’ll likely want your pension to remain invested and growing in retirement through an Approved Retirement Fund (ARF)?
In that case, you’re still a long-term investor – and you still need long-term growth. A fund that’s shifted heavily into bonds and cash will struggle to keep pace with inflation and deliver the income you’ll need through your later years.
4. Bonds are not a zero-risk asset
Most target-date funds reduce investors’ exposure to stock markets, and increase exposure to bonds, as retirement approaches.
But this is far from a risk-free approach. In 2022, it exposed investors who were close to retirement to significant losses in bonds when inflation shot up.
A more resilient approach could include a blend of growth assets, dividend-yielding shares, inflation-linked bonds, and cash, all matched to your income needs, risk appetite, and retirement plans.
5. Lifestyle funds lull investors into thinking “set and forget” is enough
Perhaps the biggest issue with target-date funds is psychological. They encourage a “set and forget” mindset.
Your pension is too important to leave on autopilot. Life changes, markets shift, goals evolve. The real key to good investing is reviewing, rebalancing, and making active decisions along the journey.
For many people, particularly those in early and mid-career, target-date funds are a solid approach. But if you’re serious about making the most of your pension as you approach retirement, it’s important to have a plan that considers your real-life goals – not just your date of birth.
