Vanguard Retirement Funds: Are These All-In-One Investment Portfolios Right for You?

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With low fees and automatic investment changes as you get older, Vanguard's target retirement funds, also known as lifecycle funds, are designed to be the only retirement investment you'll ever need. If you don't know what a target retirement fund is, here's a primer, as well as the pros and cons of Vanguard's offerings.

How do target-date retirement funds work?

Target-date retirement funds, also known as "target" or "lifecycle" funds, are designed to be all-in-one vehicles to help people invest and save for retirement. These funds invest in a combination of stocks and bonds, and aim to create an age-appropriate strategy for their target investor group.

Since stocks have higher growth potential, but more volatility, and bonds have less potential for growth, but offer relative stability, target-date funds allocate more of investors' assets to stocks when they're younger, and gradually shift into bonds as retirement approaches.

I'll get into more detail in a bit, but as an example, Vanguard's Target Retirement 2055 fund has about 90% of its assets in stocks and 10% in bonds, since its investors have nearly four decades to allow their money to grow, and to ride out any short-term market swings. On the other hand, Vanguard's Target Retirement 2020 fund's investors are getting pretty close to retirement, so it keeps just 60% of its assets in stocks.

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On that note, it's important to point out that target funds never completely get rid of stocks (and you shouldn't either). Every company with target funds has its own methodology, but Vanguard's aim is to reach a 30%/70% mix of stocks and bonds about seven years after each fund's target investors retire. For example, the 2020 fund I just discussed will continue to shift assets from stocks to bonds until about 2027.

Vanguard's Target Retirement funds

Vanguard has a range of retirement funds, from the Target Retirement 2060 fund intended for people just getting into the workforce, to the Target Retirement 2010 fund for recently retired workers transitioning to an income- and preservation-based investment strategy. In addition to the dated funds, there's also a Target Retirement Income fund, intended for investors who have been retired for seven years or more.

Here's a quick chart of Vanguard's retirement fund offerings, and the current investment mix of each one.

Fund name

Symbol

% in Stocks

% in Bonds

Expense Ratio

Target Retirement 2010

VTNEX

34%

66%

0.14%

Target Retirement 2015

VTXVX

50%

50%

0.14%

Target Retirement 2020

VTWNX

60%

40%

0.14%

Target Retirement 2025

VTTVX

65%

35%

0.15%

Target Retirement 2030

VTHRX

75%

25%

0.15%

Target Retirement 2035

VTTHX

80%

20%

0.15%

Target Retirement 2040

VFORX

90%

10%

0.16%

Target Retirement 2045

VTIVX

90%

10%

0.16%

Target Retirement 2050

VFIFX

90%

10%

0.16%

Target Retirement 2055

VFFVX

90%

10%

0.16%

Target Retirement 2060

VTTSX

90%

10%

0.16%

Target Retirement Income

VTINX

30%

70%

0.14%

Source: Vanguard.

Advantages and disadvantages of target retirement funds, and Vanguard's in particular

The most obvious advantage of target retirement funds is simplicity. All investors need to do is put money into these funds, generally through a 401(k) or IRA, and the fund does the rest. There's no need to change your stock/bond allocation over time, nor is any other maintenance or homework required.

One Vanguard-specific advantage is that its target retirement funds are cheap. Vanguard investment products have a well-deserved reputation for being some of the cheapest in the market, and the retirement funds are no exception. Since these are not actively managed funds, but pass-throughs for other Vanguard index funds, they have extremely low expense ratios ranging from 0.14% to 0.16%.

The possible disadvantage is that Vanguard's target-date retirement funds will simply match the performance of the fund's underlying indices. In other words, there is no possibility of "beating the market" over time. This is the trade-off that comes with low-cost passive investing.

The bottom line

If you prefer to take a hands-off approach to retirement investing, target-date retirement funds could be the best option for you. And, Vanguard's funds are inexpensive and do a good job of creating an age-appropriate asset allocation as time goes on. If they're offered by your 401(k), or even if you invest through an IRA, hands-off investors may want to give Vanguard's target retirement funds a closer look.

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.