Making Target-Date Fund Decisions When You Enter Retirement: A Buyer's Guide

Retirement marks a turning point in your investment strategy. If you’ve accumulated assets through a target-date fund during your working years, the question of when can you buy and sell target date funds becomes especially critical once you stop working. Many retirees don’t realize that the fund designed for accumulation may not align with their actual retirement needs—and knowing the right time to exit or hold on can make a significant difference in your long-term financial security.

Understanding How Target-Date Funds Work

Before discussing exit strategies, it’s important to grasp the mechanics. A target-date fund operates as a professionally managed mutual fund that automatically shifts your money between stocks and bonds as you approach a specific retirement year (such as 2055 or 2060). Early in your career, when the target date is distant, the fund holds primarily stocks for growth potential. As years pass and retirement approaches, fund managers gradually reduce stock exposure and increase bond holdings to reduce volatility.

However, all target-date funds are not created equal. The critical distinction lies between two structures: “to” funds and “through” funds. Understanding which type you own determines not only when you can sell but whether you should.

“To” Funds vs. “Through” Funds: Why It Matters for Your Exit

A “to” fund stops rebalancing once the target retirement date arrives—essentially becoming static at that point. For investors in these funds, retirement is a natural sell signal. Your fund’s glide path (the predetermined schedule of stock-to-bond reallocation) reaches its destination and halts, which may leave you with a suboptimal allocation for your actual retirement timeline.

By contrast, a “through” fund continues its rebalancing process indefinitely, maintaining a dynamic approach even after you retire. If you hold this type, retirement doesn’t automatically trigger a sale, but it does warrant reassessment.

To identify your fund type, check your prospectus or contact your broker directly. This single step determines whether you should actively plan an exit or take a more measured approach.

Timing Your Exit: The Tax Consideration

The question of when you can buy and sell target-date funds depends partly on where the fund lives. If your target-date fund resides within tax-advantaged accounts—a 401(k), IRA, or similar vehicle—you can sell it immediately upon retirement without tax consequences. Rebalancing among investments within these accounts incurs no capital gains liability.

The situation becomes more complex with funds held in standard brokerage accounts. Selling may trigger capital gains taxes on the appreciation accumulated over your working years. In this scenario, consider alternative approaches: retain the fund while adjusting other holdings to rebalance your overall portfolio, or if you have earned income, contribute to a Roth IRA with proceeds from a partial sale (up to annual contribution limits). Roth accounts shield future growth from taxation—a valuable advantage for retirees seeking multi-decade income streams.

Assessing Your Target-Date Fund’s Fit

Even if you own a “through” fund inside a tax-protected account, retirement requires honest self-evaluation. Does your fund’s asset allocation match your risk tolerance and expected longevity?

A commonly referenced retirement formula subtracts your age from 110 to determine your stock percentage, with the remainder in bonds. A 70-year-old, for instance, would target approximately 40% stocks and 60% bonds. If your target-date fund allocates significantly less to stocks—say 30% or lower—and you expect to live well into your 90s, the conservative positioning may inadequately support your income needs. Conversely, if you’re highly risk-averse, maintaining a slightly higher bond percentage than the formula suggests may provide psychological comfort, though avoid deviating more than 10% above recommended bond levels, as returns may then prove insufficient for sustainable retirement withdrawals.

The Practical Mechanics of Buying and Selling

Once you’ve decided that selling makes sense—whether you own a “to” fund that’s reached its endpoint or a “through” fund misaligned with your objectives—execution differs by account type.

Within tax-advantaged retirement accounts, simply place a sell order and use the proceeds to purchase alternative stock and bond holdings, individual securities, or diversified index funds that better reflect your desired allocation. The transaction incurs no tax event.

For standard brokerage accounts, execute the sale similarly, but acknowledge the capital gains tax due. Calculate this liability beforehand to make an informed decision. If the tax burden is manageable and you have earned income, redirecting sale proceeds into a Roth IRA (to the extent of your annual contribution limit) offers tax-free growth on future gains—effectively salvaging some tax efficiency from an otherwise taxable situation.

Why This Matters for Your Retirement Income

The stakes are substantial. Retirees today often live 30+ years in retirement, and investment returns directly correlate with portfolio longevity. A fund with an overly conservative allocation may not generate sufficient returns to sustain withdrawals across decades, forcing you to deplete capital faster. Conversely, holding allocations too aggressive for your risk tolerance invites psychological stress and potentially poor decision-making during market downturns.

By strategically timing when you buy and sell target-date funds—or consciously choosing to retain and supplement them—you regain control over your financial trajectory when it matters most. Whether you’re exiting entirely at retirement or fine-tuning a “through” fund’s holdings, informed decision-making ensures your investments work optimally for your specific situation, not a generic target date. This proactive approach forms the foundation of a sustainable retirement strategy.