Mutual "retirement year" funds

[Samtex]

What are some opinions about the mutual funds that allow you to select the year you wish to retire and they do the proper allocations? I know Vanguard, as well as others have these. I know many would prefer to do their own allocations but I don't feel I have the proper background. We are fairly well diversified but I think it's time to shift to more stable / less risky funds.

 

[ziggy29]

We've talked about these from time to time. I think they are fine for people who don't want to be "hands on" with their portfolio and who don't have the inclination or desire to tinker with their asset allocations themselves. The one caveat is that investors shouldn't look at the date in the fund name, but rather for the allocation that currently fits their goals and risk tolerance profile.

Having said that, I would guess that most of the folks on this board (not a representative sample of everyone out there, IMO) prefer the control of "rolling their own" asset allocation and rebalancing themselves. 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.

Despite all that, they are an adequate choice for a "set and forget" type of investor. It's usually far better than parking all of it in an MMF as too many folks (even the young'uns) do in a 401K plan. I cringe when someone is 30 and they are putting all of their 401K contributions into a money market fund...

 

[travelover]

I agree with Ziggy. Look at the total expense ratio, too. Some fund families pile on expenses combining individual fund expenses with an overall charge for the target fund. I believe Vanguard does not do this.

In my investing life, indecision has cost me more than fund choices. I see these target funds as a good way to let someone else do the heavy lifting, on the cheap.

 

[Stevewc]

The target retirement funds are very good.
Keep in mind that you do not necessarily have to go by your exact age or retirement year. It is up to you on date choice. I personally go with a more conservative, less risky portfolio year. Look at the underlying funds and percentages and choose your risk level.
Steve

Edit: Just realised ziggy covered my point.
I guess it is important enough to repeat though.

 

[freebird5825]

My only experience with target funds was in two areas:
I used the TSP L2020 fund. The year was chosen for me turning 62, not a w*rk related retirement age. The AA progression was known upfront and definitely to my liking. However, I FIREd in 2007 and did a different maneuver with my TSP account.
I have a small college fund, in my name, set up for a nephew. It is a VG fund chosen for the year he turns 18. This was a "set it and forget it" move. I may revisit that selection later this year.

 

[yakers]

If you find one you like then go with it. It is not good to change these funds/your asset allocation too often but if your circumstances change (winning lottery, health change...) then you can do something else. I used a target retirement fund for several years but have switched to several index funds which leaves out an asset class I did not want to have. DW has her funds mostly in a balanced fund (VG Wellesley). You could see if there is a balanced fund that suits you.
Key to any of these is low cost funds, that and your AA choice is al you really have control over.

 

[LOL!]

These funds of mixed asset classes stocks and bonds are generally not tax efficient, so should not be held in a taxable account. By putting fixed income in a tax-sheltered account and using tax-efficient index funds of stocks in taxable, one can do better. Of course, if all your assets are in tax-sheltered accounts, then this is moot.

 

[stockwiz09]

I agree with Ziggy and Travelover - there are cheaper alternatives to target funds, but indecision (and laziness) can be even more expensive!

Does anyone have experience with a service that allows you to choose a small set of index funds and then automatically rebalances? A service that only charges 20-30 bps above the underlying EFT fees?

 

[unclemick]

Target Retirement 2015 jan 2006(picked younger than my age cause of pension and SS income stream). ?About 0.19% ER.

1966-2006 I was a legendary roll yer own/stock picker/manual rebalancer/slice and dicer/etc/etc.

Just don't ask me about performance or the price of my education.

heh heh heh -

 

[Lusitan]

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%)

It holds:
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.

 

[freebird5825]

Target Retirement 2015 jan 2006(picked younger than my age cause of pension and SS income stream). ?About 0.19% ER.

1966-2006 I was a legendary roll yer own/stock picker/manual rebalancer/slice and dicer/etc/etc.

Just don't ask me about performance or the price of my education.

heh heh heh -

Too funny - this is the fund I have my nephew's college fund set up in my name (not a 529), chosen for the year he turns 18.
I'll be the nice "rich aunt" sending him cash once in a while, but he doesn't know that yet.
Right now I'm just letting it roll...

 

[mickeyd]

5

What are some opinions about the mutual funds that allow you to select the year you wish to retire and they do the proper allocations? I know Vanguard, as well as others have these. I know many would prefer to do their own allocations but I don't feel I have the proper background. We are fairly well diversified but I think it's time to shift to more stable / less risky funds.

Hey Samtex,

Welcome here.

I would agree with the previous posts on the use of Vanguard TR funds if it suits your needs. One thing that you may wish to ponder is to look at the stock/bond ratio in TR funds that you are considering. For instance, the TR2015 may reflect your desire to retire in 2015 or so but it has about a 65/35 stock/bond ratio (what we call asset allocation AA). If your personal AA happens to be about 75/25, you may want to look at the TR2020 which has about a 73/27 mix.

Arriving at your own AA should be a big assist to you.