Her 401(k) Says 2040 on the Label. That Doesn’t Mean It Knows When She’ll Retire or How Much Risk She Can Afford
Two savers could pick the same 2040 fund, retire the same year, and walk away with tens of thousands of dollars separating their outcomes. The year on the label is only the beginning of the decision.
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A 51-year-old with $600,000 in her 401(k) picks the 2040 target-date fund because the year looks right: she turns 65 in 2040.
She never opens the fact sheet to see what the fund will own as she ages. That one skipped step could decide whether a bad market costs her $90,000 or $117,000.
The saver is hypothetical, but the concern is real. At 51, she has time to make that judgment call before she’s relying on the account for income.
What a 2040 Label Actually Promises
The year tells you when the fund is designed for an investor to retire, not whether its investments are right for you. Fund managers make assumptions about risk and how long the money needs to last, but they don’t know your circumstances. The SEC warns that target-date funds offer no guarantee of sufficient retirement income, even if you hold them until the year on the label.
Each manager builds its own glide path, which is the schedule for moving money from stocks into bonds. Two funds with identical labels can hold very different mixes, and they fall into two broad camps:
- A “to retirement” glide path hits its most conservative mix at the target year, then holds steady.
- A “through retirement” path keeps moving toward bonds for years after the label date, so it holds more stock in the years leading up to 2040.
Same Year, Two Very Different Outcomes
Suppose her entire $600,000 sits in one of two hypothetical 2040 funds. In the bad-year scenario, stocks fall 30% while bonds stay flat. In the positive-year example, stocks gain 7% and bonds return 4%.
| Example 2040 Fund | Stock/Bond Mix | Loss in a 30% Stock Drop | Gain in a Normal Year |
|---|---|---|---|
| Fund A | 65/35 | $117,000 | $35,700 |
| Fund B | 50/50 | $90,000 | $33,000 |
In the simulated crash, Fund B loses $27,000 less. In the example positive year, Fund A earns $2,700 more. Over time, higher stock exposure offers more growth potential, but it also leaves her more vulnerable to losses. And because target-date funds gradually change their investments, neither mix will necessarily stay the same between now and 2040.
The trade-off is important. A fund that moves too quickly into bonds may struggle to keep up with rising living costs over a long retirement. But holding more stocks also means taking larger losses when markets fall. The research inflation index for older Americans rose 3.6% over the past year, while the standard Medicare Part B premium climbed to $202.90 a month in 2026, up from $185. She needs enough growth to support her retirement without taking more risk than she can afford.
Her contributions make the glide path matter even more. At 51, she can contribute up to $32,500 in 2026, including the regular catch-up allowance. Under today’s rules, workers ages 60 through 63 get an even larger catch-up opportunity, although the dollar limits will change before she reaches those ages. Every contribution buys into the investment mix the manager has chosen.
Five Checks to Run on Your Own 2040 Fund
- Current stock and bond split. Pull the fact sheet and compare today’s equity share with what you would tolerate losing in a 30% decline. Run the same rough math as the table above on your own balance.
- Glide path end point. Find the year the fund stops getting more conservative. If it lands at 2040, it is a “to” fund. If it keeps going for years after, it is a “through” fund. Within the same fund family, choosing 2035 instead of 2040 generally means a more conservative mix, while 2045 typically means more stock exposure.
- Expense ratio. Consumer advocate Clark Howard points to low-cost target-date index funds charging around 0.20% a year or less. On her $600,000 balance, a 0.20% fund expense ratio costs $1,200 annually, compared with $4,500 at 0.75%. Check for additional plan fees, too.
- Employer default. If your plan auto-enrolled you by birth year, your employer chose the manager and its glide path. Confirm that its assumptions match your real retirement date, because your plan may offer a better fit.
- Separate emergency cash. The fund’s bond portion shouldn’t double as your rainy-day fund. Before 59½, early withdrawals can trigger a 10% additional tax. Later, a large withdrawal from a pretax 401(k) could push up your taxable income and eventually your Medicare premiums. Keeping six to 12 months of expenses in accessible savings can help you avoid tapping retirement investments for emergencies.
The year on the label is a starting assumption. Your real retirement date and your tolerance for losses should decide your allocation, and checking it takes about 15 minutes with a fact sheet.
Contact [email protected] for any questions or corrections.
Gerelyn Terzo is the author of dividend investing handbook "Dividend Investing Strategies: How to Have Your Cake & Eat It Too." A veteran financial journalist, she covers agri-finance for outlets like Global AgInvesting and the broader stock market and personal finance for 24/7 Wall Street. She began at CNBC and later helped launch Fox Business in New York. Gerelyn currently resides in Woodland Park, Colorado and dabbles in nature photography as a hobby.
