We’re so boring when it comes to investing and retirement.
But I think boring is good.
We do the vast majority of our retirement investing through one single fund: Vanguard Target Retirement 2040 Fund (VFORX).
Our goal every year will be to max out those last two accounts using this one fund.
Vanguard’s Target Retirement 2040 Fund is what’s known as a target-date retirement fund, which is a type of mutual fund. Meaning, it is a collection of multiple stock funds, bond funds, and cash funds.
Specifically, this target fund contains these three funds:
- Vanguard Total Stock Market Index Fund Investor Shares
- Vanguard Total International Stock Index Fund Investor Shares
- Vanguard Total Bond Market II Index Fund Investor Shares
What makes target-date funds different from other mutual funds is that they automatically adjusts their asset allocation between those fund types as the fund ages. For example, a target fund might be invested in 90% stocks / 10% bonds right now, but by the time you retire, it might be invested in 40% stocks / 40% bonds / 20% cash.
Which makes sense, because as you age, your acceptable risk (% in stocks) should go down because you are getting closer to actually needing those funds. Vanguard has more target funds than just this one. Here is their complete list:
- Vanguard’s Target Retirement 2010 Fund
- Vanguard’s Target Retirement 2015 Fund
- Vanguard’s Target Retirement 2020 Fund
- Vanguard’s Target Retirement 2025 Fund
- Vanguard’s Target Retirement 2030 Fund
- Vanguard’s Target Retirement 2035 Fund
- Vanguard’s Target Retirement 2040 Fund
- Vanguard’s Target Retirement 2045 Fund
- Vanguard’s Target Retirement 2050 Fund
- Vanguard’s Target Retirement 2055 Fund
- Vanguard’s Target Retirement 2060 Fund
I chose this particular fund from Vanguard for several reasons. Here are a few:
1. My Age – The Vanguard Target Retirement 2040 Fund is built for someone who is retiring on or with a few years of the year 2040. My guess is that I won’t be able to work (or at least won’t want to work) when I’m 65. I turn 65 in the year 2040. Mrs. PT will turn 60 (I married young, I know).
As a reminder, I don’t invest for retirement to get rich necessarily. I invest in retirement to take care of my self (food, shelter, care) when I can no longer get up and go to a job or business.
2. My Risk Tolerance – Again, the Vanguard Target Retirement 2040 Fund is supposedly built for someone who is retiring on or with a few years of the year 2040. I’ve looked at the asset allocation of the fund, and I am comfortable with that based on my own risk tolerance.
Age and risk tolerance go hand-in-hand. The number on the fund (i.e. my age) isn’t the only thing that guides me in my choice of asset allocation. I also consider my own tolerance for risk, something I discovered recently by meeting with a financial planner.
3. Expenses – Unlike some other target-date funds, which were often criticized for their expenses, this particular fund (as with most Vanguard funds), is inexpensive. It currently has an expense ratio of 0.19%. That’s actually low for any mutual fund, period.
I like to keep my investing expenses low, because unlike performance, it’s something I can completely control. How much you pay to invest in retirement matters.
4. Convenience – If there were no target-date funds, I would have to create this type of investment product by investing in multiple mutual funds to get to the right level of asset allocation and diversity. I would also have to re-balance them myself each year to maintain the proper allocation. I see no reason to fool with this type of work.
5. Performance – I have no reason to believe that this fund won’t perform the same or better than any other retirement investment over the next 28 years. It’s anyone’s guess what will happen. History is not a guarantee of future performance, but we can look to history as a guide.
This fund is investing in stocks and bonds, the two most historically common asset classes for retirement investing. Why are they the most common? Because they performed the best historically. Good enough for me for now.
A word of caution if you are going to invest for retirement and are considering a target-date fund, remember that they are not all created equal. Study expense ratios and be sure to understand the underlying asset allocation, so that you can be sure you agree with it. Don’t just default to your retirement date.
While you may be retiring around 2040 like me, you don’t necessarily have the same risk tolerance as me. For example, in 2038, you might not like that 50% of your money is tied up in stocks and could be subject to market turmoil like we saw in 2008.
Additionally, there are other factors (like the type of account you are using, the size of your portfolio, etc.) that might prevent target-date funds from being the best choice for you.
One last point…As I was studying this today, I started wondering about risk, and the risk that might be present in these types of funds because (1) you are keeping your funds with one mutual fund company, and (2) you are allowing just a few (in this fund’s case, three) fund managers to decide your fate. I’m not sure how big of a concern this is and I couldn’t find any commentary on the subject. If you have an opinion, I’d love to hear from you in the comments.
Speaking of comments, I’d love to hear your thoughts on this target fund from Vanguard and your general thoughts on target-date retirement funds.
As always, the above wasn’t investing advice. I’m not an investing professional. Seek professional investing advice before making decisions about your own retirement. I’m simply sharing with you my own investing choices and philosophies.