Originally Posted by ziggy29
We can use lower-fee index funds and ETFs (many "target" funds have an expense ratio close to 1% compared to 0.1% to 0.2% for many index funds and ETFs), and many of the "target" funds are stuffed with mediocre-to-poor mutual funds in that fund family instead of their star performers.
Vanguard Target Retirement 2040 Fund (expense ratio 0.19%)
Vanguard Total Stock Market Index Fund Investor Shares
Vanguard Total Bond Market Index Fund Investor Shares
Vanguard European Stock Index Fund Investor Shares
Vanguard Pacific Stock Index Fund Investor Shares
Vanguard Emerging Markets Stock Index Fund Investor Shares
Looking at the expense ratio of the underlying funds, the TR2040 expense ratio seems to be simply based on the weighted expense ratios in the underlying funds. All of which are low-cost, very solid index funds.
I see a few important benefits of holding a target retirement fund:
(1) When you're a young investor without substantial investments, holding one fund such as a target retirement fund is lower-cost than holding small amounts of the component funds, because even Vanguard charges account maintenance fees for funds with balances under 3K (or something like that). With the target retirement fund, you can hold multiple funds without having to pay all of the annual account fees. (As your assets grow beyond a certain amount, Vanguard waives these fees so it doesn't apply to those with larger investments).
As your assets grow substantially, target funds I think become less cost-effective, because you can get lower-cost shares (e.g. admiral shares for some Vanguard funds) through holding them individually but not through the target funds.
(2) Auto-rebalancing. Don't underestimate the value of an auto-rebalancing fund. This is good not only for the lazy among us (me included) but also for those times when the stock market crashes 50% and you're staring deer-in-the-headlights at your investments and don't have the guts to rebalance and buy some stocks on the cheap (also me). The target fund does it for you, and keeps your asset allocation in check.
But I agree with Ziggy that you should pick your target retirement based on the asset allocation, not based on the year. Especially for someone who FIREs at a relatively young age, you probably want to hold a target retirement fund that's dated later than your FIRE date, because you need greater stock exposure and your investment horizon is longer.
Also, you may want to tweak the allocation, such as by holding more international funds, or adding in a REIT, or whatever. But as a core fund, they're pretty good. And they're excellent for someone just getting started.