Paul Merriman
Sound Investing For Every Stage of Life 

Achieving Success with Target Date Funds

By Chris Pedersen

In this article you’ll learn:

• What’s good and bad about Target Date Funds (TDFs) for retirement • Various approaches investors can use to improve their expected returns

• About a new kind of TDF with even higher expected returns that investors can find at Motif Investing, or do on their own.

Who is this article for?This article assumes you are familiar with Paul Merriman’s work and are interested in TDFs and how to do better with them.

Why TDFs?

One of today’s most widely used and convenient methods of saving for retirement is the Target Date Fund (TDF). Typically, the name of the fund includes the target retirement year, so picking the right fund is as easy as deciding when you think you’ll retire.

These funds promise broad diversification across equities and geographies with risk that declines as you approach retirement, enabled primarily by increasing the percentage of bonds.  This changing set of asset allocations with age is called a glide path. Since TDFs are often available at low cost, many see them as the simple and ideal retirement investment choice. Though we agree that TDFs are simple, we have questions & concerns.

How ideal are TDFs?

First, TDFs often carry 5%, 10% or even 20% in bonds* in funds for investors still 40 years from retirement. For a younger investor, a portfolio that has 40 years to recover from a downturn and benefits from monthly, quarterly or yearly dollar-cost-averaging, wouldn’t it have a higher likelihood of success with less fixed income early on? * Bonds usually represent a relatively low return on a safe and fixed income investment and are recommended for investors of conservative risk and greater age.

Second, if someone is committed to using a TDF like the Vanguard Target Retirement funds but wants to take more risk to offset the conservative bond allocation, could they increase their chances of success by putting a portion of their savings into small-cap value?

Third, most TDFs use a fixed mix of equities throughout their duration. If a young investor can handle more risk, wouldn’t tilting more towards small and value assets improve the chances of success?

To answer these questions, we built a Monte Carlo simulator to model the likelihood of success, and show how the risk of losing money varies with age and approach.

Testing scenarios 

The Monte Carlo simulator creates a thousand plus experiences for each scenario by randomly combining sequences of years of historical returns from 1990 through 2016, which are the years that have sufficient asset class detail for the analysis. These are the scenarios we tested:

  • 100% Vanguard-Like Target Retirement fund (best approximation possible)
  • 90% Vanguard-Like Target Retirement fund and second independent 10% Small-Cap-Value fund
  • 80% Vanguard-Like Target Retirement fund and second independent 20% Small-Cap-Value fund
  • A new target date glide path that tilts heavily to small-cap-value and emerging markets in the early years.

For each of these, we evaluated the likelihood of success in saving for retirement at 10%, 15% and 20% of gross income savings rates from ages 25 to 65. We defined success as accumulating 25 times gross income minus savings, which allows for replacing after-savings income at a 4% withdrawal rate.

40-Year Monte Carlo Simulated Scenarios & Results

Assumes $100k/year household income and annual contributions, age 25 to 64

  Vanguard-like Target Date Fund 90% Vanguard -like TDF & 10% Small Cap Value fund

80/20 Vanguard-like TDF & SCV

(no rebalance)

Merriman Target Date Glide Path
Success Rate @ 10% Savings & Median End Balance



(CAGR = 8.8%)

(90% of sims > $2.1M)



(CAGR = 9.5%)

(90% of sims > $2.5M)



(CAGR = 10.0%)

(90% of sims > $2.6M)



(CAGR = 10.4%)

(90% of sims > $3.1M)

Success Rate @ 15% Savings & Median End Balance









Success Rate @ 20% Savings & Median End Balance









Risk vs. Time (one-in-40 year balance declines including effects of dollar cost averaging contributions)        


  • Expense ratio assumed to be 0.16%.
  • Vanguard-like substitutes intermediate bonds in place of TIPS due to longer available history.
  • Median end-balances include inflation and assume savings is % of $100k/year income increasing with inflation from 25-65 years old.
  • Assumes inflation-adjusted annual contributions beginning at age 25 and ending at age 65 with annual rebalancing within TDFs, but not between TDFs and SCV second funds.
  • Small-Cap-Value additions to Vanguard-like TDFs modeled as 100% US small-cap-value.
  • CAGRs calculated using Excel XIRR function with median end-balances and average-inflation-rate-adjusted contributions.

For those able or willing to save only 10% per year, the Vanguard-like TDF has a good risk profile, but then the chances of success are less than one in three at a 10% savings rate.

Investing in a 90/10 or 80/20 mix of Vanguard-like TDF and small-cap-value brings increases the likelihood of success to 48% to 57%, but also increases risk of losing money nearing retirement.

The Merriman Target Date Glide Path

To deliver similar or better returns, but also manage the risk down nearing retirement, we’ve designed the Merriman Target Date glide path. It does this by tilting heavily toward small-cap-value and emerging markets in the early years, then shifts to a balance of bonds and a diversified worldwide portfolio nearing retirement. Simulation shows this option to have the highest likelihood of success, highest median end balances at age 65, but slightly higher risk in the early and middle years.

The “median end balances” represent the midpoint of simulation results with half being higher, and half being lower. It’s important to note that these numbers are not adjusted for inflation. To see what they’d be worth in today’s dollars, you would need to divide them by 2.5 – 3.5, so a $5M median end-balance would only be worth $1.4M to $2M in today’s dollars.

Another striking observation from the “risk vs. time” graphs (at the bottom of the above chart) is that because contributions are regular and substantial, it’s almost impossible to have too much risk of the balance declining in the early years. If the market is down, an investor will feel it, but since the model assumes they are contributing regularly in amounts that are large relative to the account balance, they won’t feel it nearly as much as an older investor.

Finally, the simulations confirm that saving 15% to 20% over a 40-year career is a fairly safe way to ensure saving enough, regardless of which approach you use as long as it includes substantial diversified equities, which all of these approaches do. The other way to see it is that saving at these higher rates may set you up for an earlier retirement, or a more comfortable retirement at age 65.

What if Parents Help Kickstart the Process? 

If we use the same glide path with a 65-year horizon, what would be the impact of a parent or grandparent investing $365/year (increasing with inflation) from age 0 through 24, or a lump sum of $3,000 at birth? The simulations show the impact can be dramatic, increasing chances of success from 60% to 74%, and more than doubling the median end-balance.



Merriman Target Date Glide Path

Merriman Target Date Glide Path With +$365/yr (infl. adjusted) from age 0-25 or $3k at birth

Success Rate @ 10% Savings & Median End Balance



(Less inflation = $2.8M)

(CAGR = 10.4%)

(90% of sims > $3.1M)



(Less inflation = $6.3M)

(CAGR = 10.5%)

(90% of sims > $6.8M)



Target date funds that add bonds in the early years create significant drag on long-term investor returns. The only justification we can think of for that drag is a belief that young investors will bail out of their investments in a market downturn without that added stability. Perhaps this is needed in a mass-market offering, but we believe savvy young investors would be better served by having no fixed income in their early years.

One simple approach to mitigating the drag of bonds in a target date fund is to augment it with a second investment in a small-cap-value fund. This relatively simple approach significantly increases the chances of success in our modeling with manageable increases in risk when approaching retirement.

Lastly, our simulated results suggest young investors can benefit even more by tilting heavily toward small-cap-value and emerging markets in their early years of investing.

Investors need to be aware that there are likely to be many years, even a decade or more, where this approach does not match or beat the S&P 500. Having said that, the higher expected balances more than offset the risks, making it a most attractive alternative for some.

Merriman Target Date Retirement Glide Path Allocation vs. Age 

  • Geographic equities mix is 70% US, 20% developed international, and 10% emerging markets.
  • At beginning, there is no fixed income, and equities are all small-cap value plus 10% emerging markets.
  • At end, there is 50% fixed income, and equities are a balance of all listed asset classes.

Motif Target Date Funds & Limitations     

There are limitations with Motif of which you should be aware. As of October 2017, Motif does not allow community funds to automate deposits, investing, rebalancing or dividend reinvestment. Consequently, you’ll need to do these yourself with the associated trading costs. Motif assesses a platform fee of $10 if the account does not have a trade within a 6-month time period and has a balance of less than $10,000. To minimize your costs, you could contribute at the beginning of the year by investing the contribution plus accrued dividends, then rebalance six months later for a total commission of $9.95 x 2 = $19.90 per year.

If these issues will make a difference in your level of contribution or investing discipline, you may want to use a full-service provider such as Vanguard and chose whether to use their TDF as-is, augment it with some small-cap-value, or copy the Merriman Target Date glide path described here.


Past performance is no guarantee of future performance. At best, Monte Carlo Simulations are a cloudy crystal ball giving us some indication of what the future might look like if particular trends like the correlation of growth and risk persist. The value of such predictions is usually poor in the short-term and better in the long-term.


The Merriman Financial Education Foundation receives approximately $1 per Motif transaction. While you can view the portfolios at Motif Investing without an account, you must create one to see all of the allocation details.


We do not render personalized investment advice. This article provides general investment guidance on the investment philosophy of Paul Merriman (writing as Paul A. Merriman) with supporting work done by Chris Pedersen.

This article contains data gathered from sources that are believed to be reliable. However, we can make no representations as to their accuracy or completeness. This article is not intended to offer specific investment, accounting, legal or tax advice to any individual investor. Paul Merriman, or the others mentioned on this website, do not render or offer to render personalize investment advice or financial planning advice through this website.