Stocks — Part XV: Target Retirement Funds, the simplest path to wealth of all

Ok, so you’ve read the Smoother Path to Wealth and thought,  “Aww man.  Three funds?  And I gotta rebalance them every year?  That’s too much to keep track of!”

Picard aww man

But then you hit the link and went to the Simple Path to Wealth.  As you read, you thought, “This is more like it.  Only one fund.  This I can handle.”  But then you got to the part where, maybe 40 years from now as you start looking at retirement, you’re going want to add a couple more.  “Aww man!”

jlcollinsnh hears your pain.  You need the simplest of all possible paths.  You need to be able to buy just one fund and own it till your dying day.  Any asset allocation crap should be handled for you.  You have bridges to build, nations to run, great art to create, diseases to cure, businesses to build, beaches to sit on.  Motorbikes to ride.  I’m here for you bunkie.

More importantly, so is Vanguard with a series of 11 Target Retirement Funds.* For that matter, so are other mutual fund companies, but as you know Vanguard is the primo choice around these parts so we’ll be talking about these. If your 401k or similar plan offers only one of the others, what is said here (excepting expense ratio costs) applies.

*(For some reason this link doesn’t stay set to just the Target Retirement Funds.  To bring them up when you get to the page, look at the left hand column.  Under Asset Class chose Balanced.  Under Fund Minimum be sure only $1000 is checked.  Under Management chose Index.  That should bring them up.  Then you can simply click on each to check out the specifics.)

If you click on the link you’ll see that these eleven funds range from Target Retirement 2010 to Target Fund 2060.  The idea is you simply pick the year you plan to retire and that’s your fund.  Other than adding as much as you can to it over the years and arranging for withdrawal payments when the time comes, there is nothing else you need ever do.  It’s a beautiful and elegant solution.

Let’s peek under the hood.

peek under the hood

Megan Fox wants to….

Each of these Target Retirement Funds (TRF) is what is known as a Fund of Funds.  That just means that the Fund holds several other funds, each with different investments.  In the case of Vanguard, the funds held are all low-cost Index Funds.  That’s a very good thing.  The TRFs ranging from 2020 to 2060 each hold only three funds:

  • Total Stock Market Index Fund
  • Total Bond Market Index Fund
  • Total International Stock Market Index Fund

To those three the TR 2015 fund adds:

  • Inflation-Protected Securities Fund

To those four the TR 2010 fund adds:

  • Prime Money Market Fund

As the years roll by and the retirement date chosen approaches the funds will automatically adjust the balance held, becoming steadily more conservative and safer over time.  You needn’t do a thing.

The expense ratios range from .17 to .19, depending on the fund.  Excellent.

What are the short comings?

Some people say the funds get too conservative too soon. Others complain that they are too aggressive for too long. For my money, I think Vanguard gets it pretty close to spot on.  Maybe a bit conservative for me personally, but then I’m on the aggressive side.  This is easy to adjust for.  If you want a more conservative (greater percentage of bonds) approach, choose a date before your actual retirement.  The earlier the date the more conservative the asset allocation.  If you want more aggressive (greater percentage of stocks), just pick a later date.

In deciding, be sure to remember what we learned looking at the Trinity Study in our discussion of withdrawal rates:  A strong dose of stocks is critical to a portfolio’s survival rate, especially once you begin drawing money out.

BTW, other fund companies use differing allocations for differing retirement dates. If those are what’s offered in your 401k or 403b plan, you’ll need to take a look and then decide. But the same principles apply.

So why doesn’t jlcollinsnh recommend them?

I do, actually, and am with this post.  They are an excellent choice for many, maybe most people.  They will certainly over time out perform the vast majority of active management investment strategies.

But I do have a slight preference for…

…the Smoother Path to Wealth and the Simple Path to Wealth.  Here’s why:

  • The expense ratios are even lower than those of the TRFs.
  • The TRFs all hold the Total International Stock Market Index Fund.  While this is an excellent fund, I don’t feel the need for additional international coverage beyond that found in the Total Stock Market Index Fund.
  • REITs are not part of the TRF mix. Held in VGSLX, these provide dividend income and, more importantly, serve as my inflation hedge.  Of course, you could easily just add VGSLX to your TRF of choice.
  • With separate funds, I can keep my bonds and REITS in my tax-advantaged accounts, protecting the dividends and interest from taxes.

Where are you likely to find Target retirement Funds?

looking under a rock

Painting by Ted Dawson

Target Retirement Funds have become very popular as options in the 401k and 403b retirement plans offered by employers. The thinking is (and it is sound) that most people really have very little interest in investing.  TRFs provide an effective, simple and well-balanced “one decision” solution.  Plus, because such retirement plans are tax sheltered, the interest from the bonds and the dividends from the stocks go untaxed.  Of course, when the funds are withdrawn in retirement taxes will be due.

What should you do?

If your 401k (or the like) offers TRFs or low-cost equivalents from another fund company, they are well worth your consideration.

If you want as simple as possible and still effective, TRFs are for you.

TRFs:  They come with the jlcollinsnh….


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