Target Date Funds and Retirement What’s Next?
What got you to retirement isn’t necessarily what’s going to get you through retirement optimally. That’s where personalized planning comes in — not just managing risk, but building a strategy that supports how you actually want to live.
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About this Episode
In this edition of The Well Balanced Podcast, Ezra Firkins sits down with Senior Wealth Advisor Mike Nesheim to unpack a scenario that pre-retirees face: I’ve got a target date fund in my 401K and I plan to retire in the next few years.
What next?
Mike and Ezra explore how target date funds work, why they’re often a great accumulation tool, and when it might make sense to move beyond them.
7 Key Takeaways
1. Target Date Funds Offer Built-in Diversification
Target date funds are “funds of funds” — they include a mix of domestic and international stocks, bonds, and cash. This provides a simple, cost-effective way to achieve diversification within a single investment, especially within retirement plans like 401(k)s.
2. They Follow a Glide Path Strategy
These funds automatically adjust their asset allocation over time, reducing equity exposure and increasing fixed income and cash as the target retirement year approaches. For example, a 2030 fund may move from 90% equities decades out to 60/40 near retirement.
3. They’re Designed for the Average Investor, Not the Individual
Target date funds use a “one-size-fits-all” model. While they can be a good fit during accumulation years, they don’t account for individual needs like healthcare costs, specific withdrawal timelines, or legacy planning.
4. Withdrawal Mechanics Can Be Inefficient in Retirement
When you take distributions from a target date fund, you’re selling both stocks and bonds in proportion to the fund’s allocation. This can be suboptimal during market downturns, as it may force selling equities at depressed values.
5. They Aren’t Built for Strategic Tax Planning
Target date funds don’t allow for intentional asset location (e.g., placing stocks in Roth IRAs for growth, or bonds in taxable accounts for stability). Personalized portfolios can be more tax-efficient.
6. They May Not Reflect Your Risk Tolerance or Legacy Goals
For investors with assets earmarked for heirs or charitable giving, target date funds may reduce equity exposure too aggressively. Customized plans can maintain higher stock allocations for long-term growth when appropriate.
7. Flexibility During Market Shifts
Target date funds don’t allow you to selectively draw from low-volatility assets in a downturn. In contrast, a bucket strategy — like the one used at Vector Wealth Management — offers withdrawal flexibility that helps clients stay invested with confidence.
Chapters
00:00 Retirement Scenario & Target Date Funds
01:24 The Glide Path Strategy & Shifting Risk in Retirement
03:12 Why “What Got You Here” May Not Get You Through
05:16 Designing a Personalized Retirement Income Plan
08:49 Transitioning to a Customized Investment Strategy
🎙️ Transcript (adapted for readability)
Ezra Firkins: Welcome to another edition of the Well Balanced podcast from Vector Wealth Management. My name is Ezra Firkins, and I’m here with Mike Nesheim. Mike’s a Senior Wealth Advisor here at Vector. Mike, welcome to the show.
Mike Nesheim: Thank you, Ezra. Appreciate it.
Ezra Firkins: Today we’re going to discuss another scenario. One of my favorite things to do is play things out hypothetically. For those listening or watching at home, this might be something you’re going through right now — or maybe a friend is — and we encourage you to share this episode with them. So, Mike, my plan is to lay out the scenario and get your take on it, working through the “what ifs.” Sound good?
Mike Nesheim: Absolutely. Sounds good.
Ezra Firkins: So here’s the scenario: I’m 60 years old and about five years from retirement. My wife and I have saved up about $2.5 million in a target date fund — specifically, we’re looking at something like the Schwab Target 2030. Vanguard has a similar one too. This is inside my 401(k). Can you walk us through what a target date fund is and what I’m actually holding?
Mike Nesheim: Sure. A target date fund is a “fund of funds.” For example, the Schwab or Vanguard 2030 target date fund includes other mutual funds or index funds — things like U.S. large companies, small companies, international stocks, bonds, etc. It’s a diversified investment strategy at a low cost, which is great — especially for people with smaller balances in their 401(k)s, because it helps them maintain proper diversification.
Mike Nesheim: Strategically, a target date fund uses what’s called a glide path. Early on — say, if your retirement is 30 or 40 years away — the fund will be heavily weighted toward stocks. As time goes on and you get closer to your target retirement year, it gradually shifts to more conservative holdings like bonds and cash. At five years out, you’re usually looking at something like 60% stocks and 40% bonds and cash.
Ezra Firkins: And just to clarify — why do we make that shift to more bonds as retirement nears?
Mike Nesheim: The idea is to reduce risk as you approach the point where you’ll need to start taking withdrawals. At retirement, that target date fund may be around 50% stocks and continue to become more conservative over time. It’s designed to manage risk by reducing volatility as you age.
Ezra Firkins: So it gives you a diversified portfolio that changes over 30 to 40 years — moving from equities toward fixed income as a percentage of your overall mix.
Mike Nesheim: Exactly.
Ezra Firkins: Now here’s the big question. It’s worked well. It’s gotten us here. Do I really need to fix something that’s not broken? Why would I consider moving away from a target date fund?
Mike Nesheim: That’s a great question. What got you to retirement isn’t necessarily what’s going to get you through retirement optimally. A target date fund is built on a one-size-fits-all approach. Once you’re at the point of retirement, we want to start looking at your individual situation — things like your expenses, healthcare needs, and a distribution plan that’s tailored to you.
Ezra Firkins: Yeah, I think about it like this: while we were accumulating assets, we were just adding to the account every paycheck. When the market dropped, we kept contributing. But now we’re entering a phase where we’re withdrawing.
Mike Nesheim: Exactly. When you’re growing your assets, staying invested and diversified works well. But in retirement, the needs shift. A market drop during retirement could force you to sell at a loss if you’re not positioned properly. You want to have short-term needs covered with safer assets.
Ezra Firkins: Right — if I’m selling from a target date fund, I’m selling a slice of both stocks and bonds. But with a custom plan, I might be able to sell from specific buckets instead.
Mike Nesheim: Exactly. Even though target date funds do some internal balancing, when you withdraw from them, you’re generally selling proportionally from stocks and bonds. At Vector, we focus on determining when clients need distributions, and we use our proprietary software — Sojourn — to build a custom plan. That way, we can allocate short-term needs to low-risk investments and keep long-term assets positioned for growth.
Ezra Firkins: Let’s talk a little more about that personalized income planning. What else goes into it?
Mike Nesheim: We look at tax strategies — what’s your current tax bracket, and how might that change over time? We consider Roth conversions and how to optimally take withdrawals from IRAs vs. taxable accounts. We also think about where to place different types of investments — for instance, putting stocks in Roth IRAs and bonds in taxable accounts. That’s asset location strategy.
Mike Nesheim: Estate planning is another factor — making sure your beneficiaries are properly set up. And we also look at long-term risks like healthcare or long-term care needs and plan for those as well.
Ezra Firkins: In our scenario, I’m 60 or 65, maybe with kids and grandkids. I’d like to leave them something someday. Can I plan for that too?
Mike Nesheim: Definitely. We regularly talk with clients about their long-term outlook. Many of them have strong financial plans, so we ask — what else do you want to do? Maybe it’s helping family or giving to charity while you’re alive so you can see the impact. And when a portfolio is expected to grow long-term — for example, if you don’t need those assets yourself — we can take on more risk and allocate more to stocks, even as you age.
Ezra Firkins: Because the next generation will realize that equity growth. Their glide path might still be decades long.
Mike Nesheim: Exactly. And even for you — 25 years from now, if you’re still living, you’ll still need growth to keep up with inflation.
Ezra Firkins: Let’s shift to the behavioral side. I’ve used this target date fund for 20–30 years. I feel good about it. How do I get comfortable making a change?
Mike Nesheim: Great point. With our bucket approach, we help clients feel confident during market downturns. When stocks drop, we can draw from assets set aside for short-term needs — which may even be performing well — and let stocks recover. That behavioral coaching makes a big difference.
Mike Nesheim: And during tough markets, we reach out to our clients to check in. People feel stress when withdrawing in a downturn, compared to contributing during their working years. We walk them through what’s happening and where the risk is in their portfolio. Because their short-term needs are protected, they’re more likely to stay the course.
Ezra Firkins: So the old plan wasn’t wrong — it just may not be best suited for the new reality.
Mike Nesheim: Exactly. It worked to get you here, but now we need to optimize your strategy for where you’re going.
Ezra Firkins: Let’s talk logistics. My wife and I are retiring. We’ve got our money in a 401(k) with target date funds. We come to Vector. What happens next?
Mike Nesheim: First, we build your Sojourn plan to understand your specific income needs. That drives your new allocation. Then we look at consolidating accounts — for example, rolling over a 401(k) into an IRA or Roth IRA, depending on the assets. This can typically be done with no tax implications.
Ezra Firkins: And if my account is at Fidelity and hers is at Schwab — that’s okay?
Mike Nesheim: Absolutely. We use Charles Schwab as our custodian, but it’s simple to transfer from most institutions. We review custodians regularly to ensure we’re comfortable with the services they provide.
Ezra Firkins: So it’s a smooth transition into a more personalized investment strategy.
Mike Nesheim: Exactly. It’s a very easy process, and it allows us to tailor the plan to your needs.
Ezra Firkins: Mike, it’s been a real pleasure having you here today to talk through why target date funds work — but might not be the best fit for retirement. Thanks so much.
Mike Nesheim: Thank you, Ezra. Appreciate it.
These discussions aim to spark dialogue about enhancing retirement readiness and making more informed financial decisions. At Vector, we delve into the nuances of scenario planning, offer insights and guidance tailored to each client's unique circumstances. If you or someone you know is pondering their financial future or seeking clarity on their retirement plan, we're here to help.
This discussion is between Mike & Ezra.
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