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

The One Fund I Use to Invest for Retirement - VFORX

Could one fund, VFORX, take care of your retirement needs?

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).

We invest in this fund within my Rollover IRA (my old 401K), our Roth IRAs, and in my new Solo 401K.

Our goal every year will be to max out those last two accounts using this one fund.

Vanguard’s Target Retirement 2040 Fund (VFORX) 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 (VFORX) 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.

Vanguard Target Retirement 2040 Fund Allocation

Vanguard Target Retirement 2040 Fund Allocation at Retirement

3. VFORX 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. VFORX 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 VFORX 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.

Related: Our Vanguard Personal Advisor Services Review: Have a Human Advisor Review Your Plan

Avatar About Philip Taylor, CPA

Philip Taylor, aka "PT", is a CPA, blogger, podcaster, husband, and father of three. PT is also the founder and CEO of the personal finance industry conference and trade show, FinCon.

He created Part-Time Money® back in 2007 to share his advice on money, hold himself accountable (while paying off over $75k in debt), and to meet others passionate about moving toward financial independence.

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  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.

    • @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.