Target-Date Funds, I Bonds and TIPS Explained

October 11, 2026 Personal Finance
This guide has 2 parts
  1. Target-Date Funds, I Bonds and TIPS Explained (you are here)
  2. I Bond Interest Rate Formula Explained
In Plain Words

A target-date fund is a ready-made portfolio that gets safer as you near retirement, and a low-cost one is enough on its own for most people saving at work. I bonds and TIPS are government bonds that rise with inflation, so your money keeps its buying power. In October 2026 TIPS pay the higher real yield, while I bonds carry no risk of price drops and let you delay tax. Crypto has no cash flows behind it, meaning it pays nothing by itself. If you hold any, keep it small enough that losing all of it would not change your plans.

Why it matters: Knowing what each option does helps you keep the plan simple and the risky parts small.

In Brief

Summary: A low-cost target-date fund, held on its own, is a complete portfolio for most workplace savers. I bonds and TIPS both protect against inflation with Treasury backing; in October 2026 TIPS pay the higher real yield, while I bonds offer no price risk and tax deferral. Crypto has no cash flows behind it, so size any holding so that a total loss would not change your plans.

  • Federal safe-harbor rules made target-date funds the usual 401(k) default; their asset-weighted average fee fell to 0.27% in 2025.
  • Between the most and least aggressive series, the median gap in stock exposure is 34 points; read the glide path.
  • I bonds bought May–October 2026 earn 4.26%, including a 0.90% fixed rate kept for life.
  • A 5-year TIPS at 2.65% real beats a 5.01% Treasury note if inflation averages more than about 2.34%.
  • Crypto is taxed as property; spot bitcoin ETF investors earned about 14 points a year less than the funds by mistiming trades.

Throughout this volume we follow a single filer earning $75,000 whose 401(k) receives $6,750 a year, deferral plus match (Part 6.5).

About 21 minutes to read. Figures and rules in this chapter last reviewed October 4, 2026.

Three holdings sit just outside the basics of 7.2–7.5: a fund that runs the whole allocation, two government bonds tied to inflation, and an asset that is mostly speculation.

Target-date funds. A target-date fund holds a complete portfolio — usually several stock and bond index funds — inside one fund named for a retirement year, such as “2060.” Its glide path shifts the mix from stock-heavy toward bond-heavy as that year approaches, and it rebalances automatically — 7.4’s two jobs in one place. Two details matter:

  • “To” vs “through.” A “to” glide path reaches its most conservative mix at the target year and stays there; a “through” glide path keeps reducing stock for years after it. Two funds both labeled 2060 can therefore hold quite different amounts of stock at 65 — the prospectus shows the path.
  • Cost. Index-based series tend to be cheap; some active series charge several times as much, and the label doesn’t say which you hold.
Under the Hood: Why Target-Date Funds Became the 401(k) Default

The fund’s popularity is partly a product of law. The Pension Protection Act of 2006 added ERISA section 404(c)(5), and the Labor Department’s rule under it (29 CFR 2550.404c-5) relieves an employer of liability for investment losses on money it invests for employees who make no choice (though not of its duty to choose and monitor the fund prudently), if that money goes into a qualified default investment alternative (QDIA). One of the permitted QDIAs is a diversified fund that mixes stocks and bonds “based on the participant’s age, target retirement date … or life expectancy”: a target-date fund.

The result shows in the data. Among Vanguard plans that named a QDIA in 2025, 98% chose a target-date fund; 84% of participants offered one used it, and 61% of all participants held a single target-date fund and nothing else. Industry-wide, target-date assets reached $4.8 trillion at the end of 2025, and the asset-weighted average expense ratio of target-date mutual funds fell to 0.27%, half its 2015 level of 0.55%.

The label does not standardize the glide path: Morningstar put the median gap in stock exposure between the most aggressive and most conservative series at 34 percentage points in 2025 (49 in 2015).

As of Oct 2026: Vanguard, How America Saves 2026 (plan data for 2025); Morningstar, 2026 Target-Date Fund Landscape (March 2026; data as of Dec 31, 2025; fee averages exclude collective investment trusts).
Worked Example — Same Glide Path, Different Fee

The household’s 401(k) receives $6,750 a year: its $4,500 deferral plus the $2,250 employer match (Part 6.5). Assume a 7% gross return for 30 years, deposits at each year-end, and two illustrative expense ratios — 0.10% and 0.60% — so the net returns are 6.90% and 6.40%. Using FV = C × [(1 + r)n − 1] ÷ r from 7.1:

0.10% fund: $6,750 × [(1.069)30 − 1] ÷ 0.069 = $6,750 × 92.78 = $626,253
0.60% fund: $6,750 × [(1.064)30 − 1] ÷ 0.064 = $6,750 × 84.85 = $572,754

Half a percentage point of fee costs $626,253 − $572,754 = $53,499 — about 8.5% of the cheaper fund’s ending balance — for the same glide path and the same underlying markets.

Bar chart of a 401(k) balance after 30 years of 6,750 dollars a year at a 7 percent gross return: 626,253 dollars in a 0.10 percent fee fund and 572,754 dollars in a 0.60 percent fee fund, a gap of 53,499 dollars
Figure c25.1 · What half a point of fee costs
Expense ratios and the 7% return are illustrative assumptions, not quotes or forecasts (as of Oct 2026); check your plan’s fee disclosure.

A good default for one account, one fund and no wish to manage the mix — it removes the allocation decision and the urge to tinker (7.7). When it isn’t: when it is mixed with other funds (a 2060 fund plus a separate bond fund quietly changes the designed allocation); when your pension, a partner’s portfolio or your tolerance for losses differs sharply from the average investor the glide path assumes; or when your plan’s version is expensive.

Research: What All-in-One Funds Do to Behavior

The case for a target-date fund rests less on its glide path than on what it stops people doing. In Vanguard’s 2025 plan data, 5% of participants who managed their own accounts traded during the year; among those holding a single target-date fund, 1% did. Morningstar’s Mind the Gap 2026 found the same pattern in dollars: over the 10 years to 2025, investors in allocation funds, which hold stocks and bonds in one portfolio, trailed their funds’ returns by 0.7 points a year, against 1.2 points for fund investors overall (7.7). Morningstar’s own reading is that simple, stand-alone options, and settings such as retirement-plan menus and target-date funds, are associated with better investor results.

The limit: these are associations, and people who choose one fund may differ from those who build their own mix.

I bonds. Series I savings bonds, sold by the U.S. Treasury, pay a composite rate that combines a fixed rate, locked for the bond’s 30-year life, with an inflation rate reset every six months from the CPI-U. The formula is fixed rate + (2 × semiannual inflation) + (fixed rate × semiannual inflation). For bonds issued May 1 to Oct 31, 2026: 0.0090 + (2 × 0.0167) + (0.0090 × 0.0167) = 0.0425503, which rounds to 4.26%. New rates are announced every May 1 and Nov 1, so the next reset is Nov 1, 2026; each bond’s rate then changes every six months from its issue month. The rules:

  • Limit — $10,000 of electronic I bonds per person (Social Security number) per calendar year, bought through TreasuryDirect. Buying paper I bonds with a tax refund ended Jan 1, 2025.
  • Lock-up — no redemption for 12 months; cash out before five years and you forfeit the last three months of interest. On $10,000 earning about 4.26%, that is roughly $10,000 × 4.26% ÷ 4 ≈ $107.
  • Tax — federal income tax only (deferrable until you cash the bond); no state or local income tax.

I bonds suit money needed in more than a year that you want shielded from inflation without price swings — not an emergency fund‘s first months (Part 1.4).

✎ Check Yourself

Two questions on this chapter. Decide on your answer first, then click “Reveal Answer.”

1. Your 401(k) holds a 2060 target-date fund. To feel safer, you put 30% of the account into a separate bond fund alongside it. What is the main consequence?

  1. The account becomes more conservative than the glide path intended
  2. The fund’s glide path switches from a “to” path to a “through” path
  3. Nothing changes, because the bond fund matches the fund’s own bond holdings
  4. The fund folds the bond fund into its automatic rebalancing
Reveal Answer

Answer: A. A target-date fund is built to be the whole allocation; adding a separate bond fund quietly changes that design, and the fund rebalances only its own holdings. (Part 7.8: Target-Date Funds, I Bonds and TIPS, and a Plain Word on Crypto)

2. In October 2026 a 5-year Treasury note yields 5.01% and new I bonds carry a 0.90% fixed rate. Held five years, roughly what average inflation must the I bond see to beat the note?

  1. About 2.34% a year
  2. About 4.13% a year
  3. About 1.75% a year
  4. About 5.01% a year
Reveal Answer

Answer: B. The I bond grows by (1.0045 × six-month inflation factor) each half-year, so it matches the note when (1.02505 ÷ 1.0045)² − 1 = 4.13%. The 2.34% figure is the TIPS break-even, which is lower because the TIPS real yield (2.65%) is 1.75 points above the I bond fixed rate. (Part 7.8: Target-Date Funds, I Bonds and TIPS, and a Plain Word on Crypto)

Next in this guide (part 2 of 2): I Bond Interest Rate Formula Explained
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