Beginner’s Guide to Schwab Target-Date Funds

American workplace plans and retirement accounts are littered with target-date funds (TDFs), and for good reason: They’re as close to “set it and forget it” investing as you’ll ever find.

Target-date funds make the investment process simple by reducing the decision about how you should allocate your funds across core assets (namely stocks and bonds) to a single factor: your expected retirement date. That’s it.

Today, I’ll be talking about target-date funds from Charles Schwab. Schwab has built a reputation for always putting the client first over the years by keeping costs down, and it was really the first broker to open its doors to the broader investing public. And most pertinent to the conversation at hand: It’s a major player in the world of retirement planning because of it’s family of Schwab target-date funds.

Let me get you up to speed with an introduction to TDFs. Then I’ll examine Schwab’s two lines of target-date funds so you can see whether (and how) they might fit into your retirement plan.

Disclaimer: This article does not constitute individualized investment advice. Individual securities, funds, and/or other investments appear for your consideration and not as personalized investment recommendations. Act at your own discretion.

What Is a Target-Date Fund?

Have you ever heard of a “balanced” or “allocation” mutual fund? These products always hold a certain blend of stocks and bonds—say, 60% equities and 40% debt.

Well, target-date funds (also known as “lifecycle funds,” “age-based funds,” or “dynamic-risk funds”) take this a step farther. These funds adjust that blend of stocks and bonds over time to accommodate investors’ needs as they approach a target retirement date. And as you can imagine, they’re an incredibly popular product among retirement planners.

They’re almost predominantly found as mutual funds, though iShares has a series of target-date ETFs. Fund families usually create target-date funds in five-year increments (say, 2025, 2030, 2035, etc.).

The math behind picking one is simple enough.

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Example

Let’s say you turned 35 years old in 2025, and that you expect to work until age 70. Your expected retirement date would be in the year 2060. So, investing in a target-date fund with a target retirement date of 2060 would make sense.

Does your age fall in between five-year increments? That’s OK! Let’s say your retirement date would be in 2063. You could choose either a 2060 fund or a 2065 fund, or own shares in both.

What if your expected retirement age changes? No problem! Target-date funds are normal mutual funds and can be bought or sold as your needs change.

The target-date fund’s allocation to stocks will generally never go to zero. Retirees need growth too, and most should maintain at least a little exposure to the stock market. The beauty of the target-date fund is that it changes your asset allocation to match your risk tolerance as you age—and it does it automatically without requiring you to actually do anything.

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What Is Asset Allocation?

Many investors dream of making a killing picking stocks. And that’s fantastic. Stock picking is stimulating and, if done well, can add some zeros to your net worth!

When push comes to shove, however, your asset allocation strategy is far more important than individual stock picking when it comes to meeting your financial goals. Asset allocation sits at the core of target-date funds and, really, at the core of all financial planning.

But what exactly is asset allocation?

Every planner has their own take, but the basic idea is simple. You diversify your portfolio across different asset classes (stocks and bonds, for instance) that, ideally, move at least somewhat independently of each other. A typical asset allocation will include:

• Equities/stocks (or stock mutual funds)
• Fixed-income investments (bonds/debt or bond funds)
• Cash
• Alternative assets such as gold, commodities, or real estate

You arrange the parts so that the overall portfolio has a risk and return profile that makes sense for you. And (importantly!) you rebalance the portfolio when the weights to each asset start to divert from your plan.

Example

Let’s say your ideal asset allocation had you 75% allocated to stocks and 25% allocated to fixed income.

First, let’s say the stock market crashes. Your stock weighting has suddenly dropped to just 50%, and your fixed-income investments have jumped to 50% of your portfolio’s worth! You need to rebalance your portfolio to get back to 75/25. You would do that by selling off some of the fixed-income investments and buying some stock.

Now, let’s say instead that the stock market shoots higher, and you find yourself allocated 85% to stocks and 15% to fixed-income investments. If you wanted to rebalance back to 75/25, you would sell some of your stocks and buy new fixed-income investments.

The idea here is to constantly reduce risk and smooth out your returns by buying low and selling high.

Asset allocation within a target-date fund takes it a step further. Apart from regular rebalancing due to market moves, the target-date fund’s asset allocation decisions involve gradually reducing the risk (buying fewer and less risky stocks, and buying more bonds) as the fund gets closer to its target retirement date and its final asset allocation.

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A Look at Schwab Target-Date Funds

Charles Schwab became a household name by offering basic and affordable brokerage services to ordinary people. Schwab was the first real mass-market discount broker and a major trailblazer in lowering trading costs for investors. Today, it remains a giant among stock apps.

Schwab has applied that same focus on the client to its suite of low-cost mutual funds and ETFs, which have amassed an impressive $1 trillion-plus in assets under management (AUM). And Schwab target-date funds are an integral part of those offerings.

Schwab breaks its TDFs into two categories:

• Schwab Target Funds
• Schwab Target Index Funds

I’ll introduce you to each line and go through a few examples of each.

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Schwab Target Funds

Schwab Target Funds provide exposure to varying mixtures of stocks and bonds, not by owning individual securities, but by holding mostly Schwab mutual funds (with the occasional outside fund). Schwab manages the asset allocation; each fund starts out with a high percentage of assets in stocks, and that gradually declines over time as the fund buys more bonds. As a general rule, then, the farther out the target date, the greater the exposure to equities.

It makes sense: When a retiree is far from retirement, they’re more concerned with growing their money, and they have plenty of time to make up losses suffered in volatile markets. But when a retiree gets closer to retirement, their needs shift to preserving the wealth they’ve accumulated and generating income from their investments for their post-salary years.

Schwab Target Funds currently range in five-year increments from 2010 to 2065, with new iterations added over time. Here’s a quick look at the lineup and their costs, many of which have been recently lowered.

Let’s compare a handful of the funds.

Schwab Target 2025 Fund (SWHRX)

The Schwab Target 2025 Fund (SWHRX) is currently allocated in such a way that’s appropriate for investors who have recently retired or who are on the cusp of retirement.

SWHRX currently invests in a roughly 55/45 blend of bonds and stocks.* Bond exposure is provided through several funds, most prominently the Schwab U.S. Aggregate Bond Index Fund (SWAGX), which accounts for a greater slice of the fund’s overall assets (23%) than any other fund. This and other debt holdings provide the bulk of the TDF’s income.

The equity “sleeve” is most concentrated in domestic large-cap companies, which are expected to provide the bulk of capital appreciation. The Schwab S&P 500 Index Fund (SWPPX) is the biggest stock-focused holding and second-largest holding overall, at 14% of assets.

While SWHRX is heavier in bonds than stocks, a portfolio that’s split roughly 55% debt/45% equities still is relatively aggressive for a person starting retirement, at least compared to historic norms. The old financial planning rule of thumb was that your allocation to stocks should be roughly 100 minus your age. So, assuming you retired at the age of 65, a 35% allocation to stocks would be “about right.”

Of course, rules of thumb are not ironclad laws. Some financial planners recommend a more aggressive 120 minus your age as their standard, for instance. In that event, you’d want a 55% allocation to stocks, which would make SWHRX too conservative.

* Technically, it’s 53% bonds, 45% stocks, and 2% cash. For simplicity’s sake, I’m going to simply lump cash (usually a very small portion of assets) in with bonds as I discuss these funds.

Schwab Target 2045 Fund (SWMRX)

The Schwab Target 2045 Fund (SWMRX) would be appropriate for a person in mid-career, somewhere in their mid-40s.

As you might expect, this target-date fund is more aggressive, at 86% stocks and 14% bonds. Among other noteworthy features, SWMRX’s portfolio invests almost 30% of assets in (predominantly developed-market) foreign equities, which tend to lag their American counterparts in growth but offer more dividend income. SWMRX’s largest position, at nearly 20%, is the Schwab S&P 500 Index Fund, followed by the Schwab International Opportunities Fund (SWMIX) at 13%.

Again, a roughly 85/15 split between stocks and bonds is a bit aggressive at this age. That’s not necessarily a dealbreaker, of course. Looking back, over a 20- to 30-year window, that level of aggression has generally paid off. Just make sure you’re comfortable with a feisty allocation, especially if you’ve already managed to amass a sizable nest egg that doesn’t necessarily require high aggression to reach your retirement “number.”

Schwab Target 2065 Fund (SWQRX)

Finally, let’s take a look at the Schwab Target 2065 Fund (SWQRX).

This is designed for that recent college graduate looking to kickstart their retirement savings. The allocation is aggressive, with 97% of the fund invested in stocks. Apart from the expectedly high allocation to the Schwab S&P 500 Index Fund (~20%), SWQRX also has heavy exposure to developed international and emerging markets.

Also worth mentioning? Target-date funds rarely hold sector-specific funds. However, Schwab’s TDF line includes exposure to real estate investment trusts (REITs) via the Schwab Global Real Estate Fund (SWASX). SWQRX specifically allocates about 5% of its assets to the fund, which is greater than you’ll see in Schwab Target Funds that are closer to their target date.

A worker just starting their career will generally not have a lot of money to invest. So, averaging into an aggressive target-date fund like this is generally appropriate. With four decades or more until retirement, you can afford to take risk, as you have plenty of time to make up losses. And given the modest sums you’re likely investing to get started, you’re not putting a substantial nest egg at risk.

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Schwab Target Index Funds

The difference between Schwab Target Funds and Schwab Target Index Funds isn’t quite what it seems. Both series of target-date funds are actively managed—that is, human managers determine the blend of holdings in each and every one of these mutual funds.

However, Schwab Target Funds hold a mix of actively managed and index mutual funds (index funds try to replicate a rules-based index, like the S&P 500). But Schwab Target Index Funds get all of their stock and bond exposure exclusively from index exchange-traded funds (ETFs).

If you value low cost above all else, Schwab Target Index Funds are the better option. Because they invest solely in low-cost Schwab ETFs, these target-date funds have some of the lowest expense ratios in the business, at just 0.08%.

Let’s take a look at the three Schwab Target Index Funds that match the retirement dates of the Schwab Target Funds above.

Schwab Target 2025 Index Fund (SWYDX)

The Schwab Target 2025 Index Fund (SWYDX) is allocated similarly to the Schwab Target 2025 Fund, splitting its assets roughly 55/45 between bonds and stocks. It gets the lion’s share of its debt exposure (43%) via the Schwab U.S. Aggregate Bond ETF (SCHZ); another 29% is allocated to the Schwab U.S. Large Cap ETF (SCHX). SWYDX also holds funds focused on international equities, short-term Treasuries, Treasury Inflation-Protected Securities (TIPS), real estate investment trusts, and small-cap stocks.

Schwab Target 2045 Index Fund (SWYHX)

The Schwab Target 2045 Index Fund (SWYHX) is more aggressive than SWYDX, and on par with its actively managed 2045 counterpart SWMRX, by allocating roughly 85% of assets to stocks and 15% to bonds. The Schwab U.S. Large Cap ETF accounts for nearly half of the portfolio’s weight by itself. A large allocation to large caps also means a large allocation to technology stocks, which make up a full quarter of the portfolio. That’s not necessarily a bad thing, of course, as U.S. tech has been a major engine of growth over the past 20 years. But tech shares are also notoriously volatile and occasionally get the short end of the stick, as they did for a stretch during 2025’s almost-bear market.

Schwab Target 2065 Index Fund (SWYOX)

Finally, let’s look at the Schwab Target 2065 Index Fund (SWYOX). SWYOX is unsurprisingly loaded with equities: At a 96% allocation to stocks, this is about as aggressive as a target-date fund can get. Just like in the Schwab Target 2065 Fund, SWYOX allocates a massive portion of assets (52% currently) to SCHX. It also has a healthy helping of developed- and emerging-markets stocks, at nearly a third of assets. 

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Frequently Asked Questions (FAQs)

How do Schwab target-date funds compare to those from Fidelity, Vanguard, and others?

As a general rule, your experience with Schwab Target Funds is going to be very similar to what you would get in target-date mutual funds managed by other fund sponsors like Fidelity or Vanguard. Most offer low-cost access to an asset allocation model that glides from more aggressive to more conservative as you reach your targeted retirement date.

But there can be differences, and those differences matter.

Let’s compare the Schwab Target 2040 Index Fund (SWYGX) to the Vanguard Target Retirement 2040 Fund (VFORX) and Fidelity Freedom Index 2040 Fund (FBIFX). All have rock-bottom expense ratios of 0.08%, 0.08%, and 0.12%, respectively. That’s close enough that fees alone aren’t going to move the needle much in terms of returns.

But the asset allocations can be noticeably different.

• SWYGX: 76% stocks (53% U.S. stocks, 23% foreign stocks), 24% in fixed income and cash
• VFORX: 74% stocks (44% in U.S. stocks, 30% foreign stocks), 26% in fixed income and cash
• FBIFX: 81% stocks (48% U.S. stocks, 33% foreign stocks), 19% in fixed income and cash

In this example, Schwab’s target-date fund is less aggressive than the Fidelity target-date fund but more aggressive than the Vanguard target-date fund. That’s neither good nor bad. But you should measure the relative aggressiveness against your own investment objectives when choosing among the target-date funds.

Should I always buy the target-date fund that corresponds most closely to my estimated retirement year?

In a word, no. Or at least not necessarily.

Target-date mutual funds are designed to make the asset allocation process simple. And they do. But this simplicity is made possible by making assumptions about your investment objectives and risk tolerance based on only one real factor: your age.

You might be significantly more aggressive or conservative than your age would suggest for any number of reasons. Perhaps you have a guaranteed inheritance that gives you the flexibility to be more aggressive. Or perhaps you have immediate cash needs or a sick family member that requires you to be more conservative.

As a very general rule, target-date mutual funds give you a great starting point. But you should always consider your overall financial situation and use the target funds in that context.

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Are indexed target-date funds better than actively managed funds?

This is an eternal debate, and the answer is: “It depends.”

Some active managers effectively beat their indexed competition even after the higher fees, trading expenses and tax considerations are taken into account. Most, however, do not. Over the past two decades, there have been only three years—2005, 2007, and 2009—in which a majority of large-cap managers beat the S&P 500. So, as a general rule, it is safe to assume that indexed target-date funds will be your better option over time.

Furthermore, active management can muddle the waters of a target date strategy, particularly if the active manager regularly makes defensive moves, such as going to cash. The percentage of the portfolio you have exposed to stocks is determined by the number of years until the retirement date, and active management can potentially skew your weights outside of the target.

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