(VFORX) The One Beautiful Fund I Use to Invest for Our 2040 Retirement

35 Comments

1. Maybe I understand this wrong but I think you would be losing money by having three investments with less in each of them. After all, compounding interest really works for us when we have larger amounts of money invested in the account. For example, it seems like you’d make more money from compounded interest (the most powerful force in the universe) with one account with $300,000 in it, rather than three accounts with $100,000 in it. I haven’t done the math, it just seems like common sense to me, so if there are any math whizzes out there please let me know if I’m wrong.

2. Great column and I agree with your general recommendations. Here’s a tip for reducing your already low Vanguard fees by more than half, but it will take a little bit of bookkeeping work to make it happen, and this will work only if you have at least $100,000 total in your accounts.

   As you might know, if you invest in the three component funds of the Vanguard Target Retirement fund separately, you can get lower expense ratios (0.07% for stock, 0.20% for international and 0.11% for bonds compared to 0.19% for the Target Retirement), as long as you have at least $10,000 in each fund. The same fund expense fees if you have under $10,000 are 0.18%, 0.26% and 0.22% respectively. Vanguard calls these lower-fee options “Admiral Shares”. If you do this, you’ll need to re-balance periodically (quarterly or annually) to keep the right asset allocation, and over the years you’ll also need to shift your overall allocation to be more conservative.

   Doing the above for the same asset allocations in VFORX will shave your expense ratio from 0.19% down to a blended 0.0939%. This may seem trivial but when you compound this over decades, it could amount to having another $30,000 or more when you retire.

   You may need to do some creative math to get the right allocations across all your accounts (his, her, 401k, IRA, Roth IRA). You don’t need to have the right allocations within each account, you just need to have the right allocations across all of your accounts as a whole. If you can make the math work, you can, for example, put your bond money in one account (in an attempt to push it above $10,000 to become eligible for the lower-fee Admiral Shares) and put all your international money in a different account.

   I’d recommend this only to someone who diligently keeps on top of their accounts at least quarterly and who is comfortable with figuring out the right allocations in a spreadsheet.

   1. @investor
      Maybe I understand this wrong but I think you would be losing money by having three investments with less in each of them. After all, compounding interest really works for us when we have larger amounts of money invested in the account. For example, it seems like you’d make more money from compounded interest (the most powerful force in the universe) with one account with $300,000 in it, rather than three accounts with $100,000 in it. I haven’t done the math, it just seems like common sense to me, so if there are any math whizzes out there please let me know if I’m wrong.

3. I think Zvi Bodie makes a great but simple point about these types of funds. They lock in your losses when they re-balance after a big plunge in the market.

4. I think Zvi Bodie makes a great but simple point about these types of funds. They lock in your losses when they re-balance after a big plunge in the market.

5. The only real downside to using a Target Retirement fund as your sole/major investment is that you are not as tax efficient as possible. Say you desired a 50/50 equity/bond AA, and your savings were about 50/50 taxable and tax deferred. If you controlled the investments yourself, you could fill your IRA with bonds, and your taxable accounts with equity funds, and you will likely owe less taxes. With the TR fund, half of your taxable account is bonds with their dividends taxed at ordinary income rates, and half of your IRA space is “wasted” with tax efficient equity index funds. Of course, this all may change if tax rates change, which seems almost a certainty.

6. Much as I admire Vanguard, I am reluctant to put all our eggs in its basket. Consequently, my wife and I divide our target-date-type accounts among Vanguard, USAA, and the TSP. Were it necessary to choose only one, I would do so with anguish, but am happy not having to do so.

   1. @quillianh Thanks for sharing. Would love to hear your response to Mike’s comment below.

      1. @Philip Taylor My post should, of course, have read “would do so without anguish” Sorry. Slip of the cursor.

         I don’t disagree with Mike, but always fear, in some famous words, the “unknown unknowns,” especially as to financial companies and markets. Consequently, I prefer three admired baskets to one.

7. Thanks for making sense of the idea of manager and company risk, Mike.

8. That’s how I feel too. As my self-awareness and investing knowledge have improved, my choice seems clearer.

9. Hi PT.

   My wife and I use a single Vanguard fund (LifeStrategy Growth) for our retirement savings as well.

   Regarding the risk of using only three fund managers, I have to admit that I’m not at all concerned. In fact, I wouldn’t even notice if one of those managers was fired and replaced by somebody else. With index funds, I care much more about what the fund is tracking than I do about who is managing the fund.

   As far as the risk of using only a single company, my understanding is that neither Vanguard nor JPMorgan Chase (the custodian of the Vanguard LS Growth fund) going out of business would have a particularly detrimental effect on my holdings.

   It’s possible that JPM could engage in fraud (such as reporting that they have all the assets they’re supposed to have, when they’ve actually stolen some) and that the fund’s auditor (PWC) wouldn’t catch it. But I don’t think that type of risk is necessarily mitigated by using multiple fund companies.

   There’s also the possibility that Vanguard could commit fraud (taking my cash and my buy order, but never sending the money or order to JPM for execution) and that PWC wouldn’t notice. But I’m not sure that that risk would be reduced by using multiple fund companies either.

10. Hi PT.

    My wife and I use a single Vanguard fund (LifeStrategy Growth) for our retirement savings as well.

    Regarding the risk of using only three fund managers, I have to admit that I’m not at all concerned. In fact, I wouldn’t even notice if one of those managers was fired and replaced by somebody else. With index funds, I care much more about what the fund is tracking than I do about who is managing the fund.

    As far as the risk of using only a single company, my understanding is that neither Vanguard nor JPMorgan Chase (the custodian of the Vanguard LS Growth fund) going out of business would have a particularly detrimental effect on my holdings.

    It’s possible that JPM could engage in fraud (such as reporting that they have all the assets they’re supposed to have, when they’ve actually stolen some) and that the fund’s auditor (PWC) wouldn’t catch it. But I don’t think that type of risk is necessarily mitigated by using multiple fund companies.

    There’s also the possibility that Vanguard could commit fraud (taking my cash and my buy order, but never sending the money or order to JPM for execution) and that PWC wouldn’t notice. But I’m not sure that that risk would be reduced by using multiple fund companies either.

11. My husband and I have all our retirement savings in Vanguard Target 2050! It seemed like a solid, easy way to just get started investing, and 4 years later we’ve learned a little more about investing and it still seems a good choice.

12. Great article for the everyday investor in IRA’s. Nice work. Active investors with self-directed accounts may look at lower cost ETFs… i.e. index funds.

13. Great article for the everyday investor in IRA’s. Nice work. Active investors with self-directed accounts may look at lower cost ETFs… i.e. index funds.

14. Great little tidbit: How much you pay to invest in retirement matters! When do you think expense ratios start to get too high to be justifiable??

    1. @tylerspraul I don’t really have a good answer for that mathematically speaking. My answer is more relational…everything else being the same, choose the cheaper fund. I think you’re able to get most funds below .50 these days.

15. I, too, have VFORX. I like this fund because if I were to try and invest in all the different index funds myself, my cost is higher because bonds and international equities have higher expense ratios. It depends how your assets are allocated, but currently, I think I get the better deal through VFORX than owning each Vanguard fund separately. As I come closer to retirement, I am not sure how the asset allocation expenses will work exactly, but I still think it will end up costing me less to go with VFORX.

    I find it funny that many people that do not like Target Retirement Funds are “personal finance advisors” that have less commission to earn these days because of automated index investing.

    1. @SunWKim You are right that the TR expense ratio is cheaper than individual funds, but the individual funds become cheaper if you can get at least $10,000 in each fund. See my comment about “Admiral Shares”.

16. I like Vanguard funds as well. I’m just not a big fan of the target funds for myself because I do have a higher risk tolerance and want more exposure to international stocks than they offer. Target funds are a great fit for most people (especially those participating in 401k’s through their employer) though because it makes it simpler and maintenance free.

17. Thanks, Joe. You nailed it. It’s equally important to know your risk tolerance. By choosing the 2030 vs the 2040 you are instantly creating a more conservative portfolio, and if that’s what you’re more comfortable with then go for it. Great example.

    1. @Philip Taylor Or pick 2050 if you’re retirement is 2040, but want to be more aggressive.

       1.  
          Question–I’m considering investing in 2 Vanguard Target Retirement Funds. My husband is 24, and I’m 26. Our primary retirement account is his 403(b). Currently it is 100% invested in Vanguard TRF 2050, but it is small since he’s had the account less than a year.
           
          What if we were to split our future investments between Vanguard’s TRF 2050 and TRF 2060? I’ve searched but haven’t found much commentary online about the idea of investing in 2 Vanguard TRFs. I’m trying to get a sense of whether this will diminish our returns, or whether it allows us to find a middle-ground between the risk of 2050 and 2060. I ask because my husband will be 63 in the year 2050, and we may be working into our late 60s or 70s. Who knows! I don’t anticipate us making the kind of money that would allow us to retire early, unless we are forced to do so by health or other circumstances. 
           

       2. jill, you really need to look at your two accounts as one singe account. For example, suppose that you have $100K in your accounts and he has $50K in his, for a total of $150K. If you are in the TRF 2050 and he’s in TRF 2060, then your “blended” account as a couple if more like a TRF 2053 because the TRF 2050 has more assets. If you look at the underlying asset allocations of each of those funds, you’ll see they’re very similar. The 2060 is 91/9 Stock/Bonds and 2050 is 90/10 Stocks/Bonds. Interestingly, the stock portion of the 2050 fund is weighted more on international stocks (3% more — not an insignificant amount) than the 2060–not sure why. If I were in your shoes, I’d just go all in on TRF 2050 for both of you and not worry about it. The differences between the two are miniscule. BTW, Vanguard has a 2055 fund (VFFVX). Do both of your programs offer that choice?
           
          It can be trickier to have target date retirement funds across two fund families (e.g. between Vanguard and T. Rowe Price) because each mutual fund company composes their target date funds with a different philosophy, and if you have holdings in two of them (even if they’re the same year) you might find that your overall asset allocation is not where you want it to be, and you might find that you have too much in one sector or too little in another if the two funds don’t have similar holdings.

       3.  @investor Thanks for your response, investor! You mentioned looking at our two accounts as only one account. I should clarify that we currently only have ONE 403(b) account (in my husband’s name through his employer)–and no 401(k)s or any other retirement accounts except two *tiny* Roth IRA savings accounts. I am not currently employed and don’t foresee getting a job with retirement benefits. We do plan to open a Roth IRA through Vanguard for just my husband, but that will be for extra contributions to benefit our taxes, not a primary vehicle for retirement savings. So, our planning is based around this one 403(b) Vanguard account.
           
          The two Vanguard target retirement funds I’m considering would be invested in through the same account (my husband’s). So, for example–say we contribute $100/month to the account, and the employer matches $100. That’s $200 per month being invested in whatever we choose. I’m wondering what potential disadvantages we would face by dividing the amount, and investing $100 each month in Vanguard TRF 2050 and Vanguard TRF 2060. (Currently, I see the advantages of it, and I prefer the higher risk of allotting some funds to TRF 2060. While I realize the ratio of stocks to bonds is the same for now and will be for years for TRF 2050 and TRF 2060, I’m thinking down the road–that it could be advantageous to keep some funds at a higher risk level for longer. When the asset allocation of 2050 starts adjusting to a more conservative mix, 2060 will continue at a higher risk level for approx another 10 yrs. I like that. But I don’t want to commit all our funds to 2060, hence the hesitation.)
           
          I realize we could just invest all $200 each month in Vanguard TRF 2055 instead, but that doesn’t answer my question–why invest in only one Vanguard TRF? I don’t understand the advantage of one TRF over two (or three or four) yet. I think if I understand this, I’ll be able to make a better decision.

18. We have the Target 2045 funds via Vanguard. I’m with you — I like the instant diversification and low fees! They say that if you go life-cycle funds, to go ALL life cycle funds with your porfolio, otherwise you’re skewing the proportions. But. My husband’s 401k is through Fidelity and we weren’t happy with the expenses their target fund has.

    Only 5% of our portfolio amount is in the 401k right now. We have it in the lowest expense fund offered to us, and it’s a large cap mutual fund. I’m fine with the extra risk and I’m fine with skewing our portfolio to slightly more stock holdings because we’re both 26 years old.

    1. @Kacie Great point about skewing. It’s all about awareness, right? If you know you have funds elsewhere (outside the TDF) and have compensated accordingly, OR it’s only minimal, then you’re good to go. Thanks for chiming in. Didn’t realize you were so young.

19. Did somebody say target? Ohhh, my mistake…

20. Love it.

21. Hi PT-

    I also use the Vanguard Target Funds 2030. I’m planning for retirement around 2040 (58 yrs.), but like a bit more bonds in my asset mix. My wife also uses the 2035 fund. I agree Target funds are a simple way to save for retirement! We also have our Roths and a short-term bond savings fund from Vanguard.

    Keep up the great posts!

    Joe

22. Hi PT-

    I also use the Vanguard Target Funds 2030. I’m planning for retirement around 2040 (58 yrs.), but like a bit more bonds in my asset mix. My wife also uses the 2035 fund. I agree Target funds are a simple way to save for retirement! We also have our Roths and a short-term bond savings fund from Vanguard.

    Keep up the great posts!

    Joe

23. Hi PT-

    I also use the Vanguard Target Funds 2030. I’m planning for retirement around 2040 (58 yrs.), but like a bit more bonds in my asset mix. My wife also uses the 2035 fund. I agree Target funds are a simple way to save for retirement! We also have our Roths and a short-term bond savings fund from Vanguard.

    Keep up the great posts!

    Joe

24. I have the Fidelity equivalent and I hate the thing lol – I think my return since purchasing it YEARS ago is still like 0%, however, I do agree with the reasons behind why you like this type of investment I just feel like the execution of the fund hasn’t been great

25. I have the Fidelity equivalent and I hate the thing lol – I think my return since purchasing it YEARS ago is still like 0%, however, I do agree with the reasons behind why you like this type of investment I just feel like the execution of the fund

Comments are closed.