When Should You Buy or Sell Target-Date Funds? A Retiree's Guide

So you’ve been maxing out contributions to target-date funds throughout your working years—but now you’re retired. Here’s the tricky part: the fund that was designed to simplify your investment life during your accumulation years may actually complicate things once you stop working. Understanding when you can buy or sell target-date funds, and more importantly, whether you should, requires knowing what you’re actually holding and what your options are.

Understanding the Target-Date Fund Architecture

Before making any moves, let’s clarify what you own. A target-date fund is built on a simple premise: it holds a mix of stocks and bonds that automatically shifts over time. The year in its name (like “2040 Target-Date Fund”) signals when the fund managers expect you to retire. Early on, the fund loads up on stocks for growth potential. As your retirement date approaches, managers gradually move money into bonds—a process called rebalancing—to reduce volatility.

The ratio of stocks to bonds isn’t fixed across all target-date funds. Different fund families implement different philosophies, which means two “2040” funds could have dramatically different allocations.

The Critical Distinction: “To” Versus “Through” Funds

Here’s where it gets important for your retirement transition. Target-date funds come in two flavors, and they behave very differently once you hit your retirement date.

“To” funds stop evolving at their target date. The fund manager performs one final rebalancing and then essentially puts the fund on autopilot. Your allocation freezes, and the fund just sits there generating (or not generating) returns. If you own this type, when you retire is precisely when you need to take action.

“Through” funds keep working even after you retire. The manager continues rebalancing and adjusting the portfolio as market conditions change and time passes. These funds don’t abdicate responsibility at the retirement date—they keep managing your money according to their mandate.

To identify which type you own, check your fund’s prospectus or call your advisor. Look specifically at the fund’s “glide path”—the documented plan for how it will adjust its stock-to-bond mix over time. If the glide path stops at your retirement date, you have a “to” fund and need to take immediate action.

Evaluating Your Fund’s Fit at Retirement

If you’re holding a “through” fund, you’re not forced to move immediately. However, retirement is the right moment to audit whether this fund still matches your actual risk tolerance and return needs.

A useful benchmark exists for retirees: subtract your current age from 110, then allocate that percentage to stocks with the remainder in bonds. At age 70, this yields a 40/60 stock-to-bond split. At age 65, you’d target 45/55.

Now compare your fund’s actual allocation to this formula. If your fund is significantly more conservative (heavily bond-weighted) than this suggests, you might be sacrificing growth when you still have 20-30+ years of retirement ahead. Conversely, if it’s much more aggressive than the formula, you may be taking on unnecessary volatility if you’re risk-averse. Deviating more than 10 percentage points from the formula in either direction warrants reconsideration.

The Tax Reality: Location Matters Enormously

Your decision to hold or sell depends critically on where the fund lives in your financial architecture.

Inside tax-advantaged accounts (401(k), traditional IRA, SEP-IRA): You have complete freedom. Sell the fund with zero tax consequences and redeploy the proceeds into individual stocks, bonds, ETFs, or any other holdings. No capital gains taxes kick in, and you can restructure your entire allocation penalty-free.

Inside standard taxable brokerage accounts: This is where most people get stuck. Selling a fund that has appreciated triggers capital gains taxes—potentially substantial ones if you’ve held it for years. You might pay 15-20% of the gains in federal taxes alone, not counting state taxes.

Three Paths Forward for Taxable Holdings

Path 1: Hold and complement. Keep the target-date fund and rebalance around it. If your fund holds 30% stocks and 70% bonds but you need 40/60, buy additional stock investments or sell bond holdings elsewhere in your portfolio. This avoids the capital gains hit while achieving your desired allocation.

Path 2: Pay the tax and clean house. If you have sufficient liquid assets outside the fund, pay the capital gains tax and sell the fund. The trade-off: you incur an immediate tax bill but gain clarity and control over every holding.

Path 3: Partial conversion to Roth IRA. If you have earned income (from part-time work, consulting, or another side gig), you can convert up to your annual contribution limit from a taxable account into a Roth IRA. The Roth provides a tax-free wrapper going forward, so any capital gains, dividends, and interest generated inside it escape future taxation. This “better late than never” strategy turns a tax liability into a tax advantage.

The Bigger Picture: Longevity and Returns

There’s a philosophical question lurking underneath this decision. Target-date funds become progressively more conservative as you near and enter retirement, which made sense when people expected 15-20 year retirements. But today, a 65-year-old has a reasonable chance of living into their 90s.

The math is simple: higher returns mean your portfolio lasts longer. A retiree who maintains a 40/60 stock-to-bond allocation will likely outpace one stuck in a 30/70 mix over a 25-year retirement, even accounting for volatility. The downside is you’ll experience larger portfolio swings in down markets.

The answer depends on your personal circumstances: Can you psychologically tolerate 15-20% drawdowns? Do you have sufficient emergency reserves outside your core portfolio? Will a market downturn force you to draw funds at losses?

Taking Action: When and How

The precise moment to buy or sell depends on your situation. For “to” funds, retirement day is your action trigger—that fund needs replacing. For “through” funds, the trigger is either (a) your first annual review in retirement, or (b) a significant life change (inheritance, large withdrawal need, major portfolio adjustment).

When you do move funds, prioritize shifting money from taxable accounts into tax-advantaged retirement accounts whenever possible. Every dollar moved into a Roth or traditional IRA gains tax protection, compounding your financial security.

The target-date fund served its purpose brilliantly during your working years. But retirement requires active stewardship of your allocation—whether you keep the fund or replace it entirely depends on which type you own, where it’s held, and whether it still aligns with your risk tolerance for what’s likely a decades-long retirement.