Vanguard target retirement funds
This article contains details specific to United States (US) investors. For non-US investors, acting on fund or ETF suggestions in it may have harmful US tax consequences.The Vanguard target retirement funds[1] are target date funds designed for retirement. They are lifecycle funds that provide a selection of highly diversified all-in-one portfolios.
These funds are structured as funds-of-funds, and charge only weighted averages of the expense ratios of the funds they hold, which are primarily indexed. Although Vanguard designed these funds primarily for someone retiring in a given year (approximately), you can use them for other goals or for significantly different retirement dates, depending on your objectives and risk tolerance. The funds have a low $1,000 minimum investment for opening a fund account.
Except for the Vanguard Target Retirement Income Fund, each fund has a date specified in its name. The funds become more conservative over time, shifting their asset allocations from equities toward fixed income. The funds' prospectus[2] indicates that within seven years of the stated date, a given fund's asset allocation will come to resemble that of Target Retirement Income Fund, which has a static allocation and is designed primarily for retirees.
As of October 2015, the twelve target retirement funds hold a total of about $193.1 billion in assets; for comparison, Vanguard Total Stock Market Index holds $400 billion.
Vanguard LifeStrategy funds are similar to Target Retirement Funds, but do not have a glide path. You can use both LifeStrategy funds and target retirement funds as an all-in-one portfolio.
Comparison with generic target date funds
Vanguard Target date funds are target retirement funds primarily built from index funds and charging only weighted averages of the expense ratios associated with the underlying funds. These are desirable fund characteristics.
As with other target date funds, Vanguard target retirement funds give you diversification and asset allocation on autopilot. Also the criticism are similar: possible mismatch between target retirement year and asset allocation choice, tax inefficiency, and possible unsatisfactory allocation choices.
Despite the already low expense ratios, Vanguard could theoretically create even cheaper versions. The underlying holdings are presently all investor class but all the funds utilized already have admiral share classes. Admiral class Target Retirement funds would theoretically serve individual shareholders with substantial balances. On the other hand, Vanguard incurs substantial costs in creating and maintaining the Target Retirement vehicles. These costs are not passed on directly to their shareholders, and the absence of additional share classes could be viewed as a sort of reimbursement. Vanguard does offer institutional target date retirement funds for institutional accounts.
Choosing a Vanguard target retirement fund
Note: Vanguard's Investor Questionnaire is designed to assist investors with choosing an asset allocation. (Select: "Begin the Vanguard Investor Questionnaire")
Target retirement funds are designed for investors who to manage their investments simply. These funds make assumptions about their potential investors; one of which is asset allocation, the single most important decision an investor has to make. They cannot know the investors risk profile.
When choosing a fund, the Bogleheads recommendation is to ignore the fund's date. Instead, determine the amount of risk you are willing to tolerate and work backwards to find a fund that matches the chosen stock/bond allocation. You may be surprised to find a large discrepancy between the planned retirement date and the fund's target date. Remember that the fund does not know anything about you.
There are some disadvantages to this method (see below), but if you are starting out then do not be put off. You can always rebalance later, especially if you hold the fund in a tax-advantaged account.
Summary asset allocation
As of February 8, 2021, Target Retirement Fund asset allocations range from 90/10 (stock/bonds) to 30/70 (stocks/bonds).
| Holding | 2065 | 2060 | 2055 | 2050 | 2045 | 2040 | 2035 | 2030 | 2025 | 2020 | 2015 | Income |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Stocks | 90.3 | 90.3 | 90.2 | 90.6 | 90.6 | 83.2 | 75.6 | 68.1 | 60.5 | 50.4 | 36.1 | 30.4 |
| Bonds | 9.7 | 9.7 | 9.8 | 9.4 | 9.4 | 16.8 | 24.4 | 31.9 | 39.5 | 49.6 | 63.9 | 69.6 |
Detailed fund allocations
As of April 30, 2020, the Target Retirement Funds' equity allocations varied from 30% (Target Retirement Income) to 90% (Target Retirement 2040-2065). The following table shows more detailed allocation information.[note 1]
| Holding | 2065 | 2060 | 2055 | 2050 | 2045 | 2040 | 2035 | 2030 | 2025 | 2020 | 2015 | Income |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Vanguard Total Stock Market Index Fund | 54 | 54.1 | 54.5 | 54.8 | 54.9 | 50.2 | 45.5 | 40.9 | 36.3 | 30.0 | 21.5 | 18.0 |
| Vanguard Total International Stock Index Fund | 36.3 | 36.5 | 35.7 | 35.8 | 35.7 | 33.0 | 30.1 | 27.2 | 24.2 | 20.4 | 14.6 | 12.6 |
| Vanguard Total Bond Market II Index Fund | 7.1 | 6.8 | 7.0 | 6.7 | 6.7 | 12.0 | 17.2 | 22.3 | 27.7 | 29.2 | 34.9 | 37.0 |
| Vanguard Total International Bond Index Fund | 2.6 | 2.6 | 2.8 | 2.8 | 2.7 | 4.8 | 7.2 | 9.6 | 11.8 | 12.7 | 15.1 | 15.7 |
| Vanguard Short-Term Inflation-Protected Securities Index Fund | 7.7 | 14.0 | 16.7 |
History
Vanguard launched its first six Target Retirement Funds on 27 October, 2003: Target Retirement 2045, 2035, 2025, 2015, 2005, and Income. It opened five additional funds 7 June, 2006: Target Retirement 2050, 2040, 2030, 2020, and 2010. The Target Retirement 2055 fund was opened on 10 August, 2010, and the Target Retirement 2060 fund was opened on 19 January, 2012. The funds' fiscal year ends on September 30 of each year.
In the years since launching the Target Retirement funds, Vanguard has made two significant changes to the funds' asset allocation: gradually increasing and broadening the international exposure in both equities and bonds; and, in 2006, increasing the funds' asset allocation to equities.
2006 target retirement changes
In March 2006 Vanguard changed the asset allocations of its existing Target Retirement Funds, increasing their aggressiveness with a larger equity allocation of roughly 10 to 20 percentage points, depending on the fund.[3] The original Target Retirement Fund allocations are provided in the Funds' preliminary prospectus, dated 5 August, 2003. Note the five year differential in making comparisons with current breakdowns.
| Holding | 2045 | 2035 | 2025 | 2015 | 2005 | Income |
|---|---|---|---|---|---|---|
| Vanguard Total Stock Market Index Fund | 72 | 64 | 48 | 40 | 35 | 20 |
| Vanguard European Stock Index Fund | 13 | 11 | 08 | 07 | ||
| Vanguard Pacific Stock Index Fund | 05 | 05 | 04 | 03 | ||
| Vanguard Total Bond Market Index Fund | 10 | 20 | 40 | 50 | 50 | 50 |
| Vanguard Inflation-Protected Securities Fund | 15 | 25 | ||||
| Vanguard Prime Money Market Fund | 05 |
2010 target retirement fund changes
On September 27, 2010, Vanguard announced that it would replace the three underlying international portfolios with a single broad international stock index fund. Vanguard also increased the overall international equity exposure of these funds from approximately 20% to approximately 30% of the equity allocations.
Under the simplified approach, most of the Target Retirement Funds were comprised of three broad index funds. Target Retirement Funds with target dates greater than five years from the current year offered allocations constructed using only three funds.[4][5][6] As the funds transitioned into the Target Income portfolio, the funds added an inflation-indexed bond fund and a money market fund to the strategic asset allocation.
The following table documents allocations in the funds prior to the change, dating from October, 2008.
| Holding | 2050 | 2045 | 2040 | 2035 | 2030 | 2025 | 2020 | 2015 | 2010 | 2005 | Income |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Vanguard Total Stock Market Index Fund | 72.2 | 72.1 | 72.0 | 72.1 | 68.2 | 62.2 | 56.3 | 50.2 | 42.9 | 32.8 | 24.3 |
| Vanguard European Stock Index Fund | 9.8 | 9.9 | 10.0 | 9.9 | 9.4 | 8.5 | 7.8 | 6.9 | 5.9 | 4.6 | 3.5 |
| Vanguard Pacific Stock Index Fund | 4.5 | 4.5 | 4.4 | 4.6 | 4.1 | 4.0 | 3.4 | 3.1 | 2.7 | 1.9 | 1.5 |
| Vanguard Emerging Markets Stock Index Fund | 3.7 | 3.7 | 3.9 | 3.7 | 3.6 | 3.3 | 3.1 | 2.6 | 2.2 | 1.7 | 1.3 |
| Vanguard Total Bond Market Index Fund | 9.8 | 9.8 | 9.7 | 9.7 | 14.7 | 22.0 | 29.4 | 37.2 | 40.0 | 42.2 | 44.6 |
| Vanguard Inflation-Protected Securities Fund | 6.3 | 14.2 | 19.4 | ||||||||
| Vanguard Prime Money Market Fund | 2.6 | 5.4 |
2011 target retirement fund changes
On May 11, 2011 Vanguard announced[7] that it was dropping the minimum investment in its target retirement funds from $3,000 to $1,000.
2013 target retirement fund changes
In June 2013 Vanguard added the Vanguard Total International Bond Index Fund to the Vanguard target retirement funds. The new international bond fund represented 20% of the fixed income allocation for each of the funds.
Vanguard also replaced the Vanguard Inflation-Protected Securities Fund with Vanguard Short-Term Inflation-Protected Securities Index Fund in Vanguard Target Retirement Income Fund, Vanguard Target Retirement 2010 Fund, and Vanguard Target Retirement 2015 Fund.[8]
The table below shows the allocations before the change.
| Holding | 2060 | 2055 | 2050 | 2045 | 2040 | 2035 | 2030 | 2025 | 2020 | 2015 | 2010 | Income |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Vanguard Total Stock Market Index Fund | 62.9 | 62.9 | 62.9 | 62.9 | 62.9 | 60.0 | 54.8 | 49.4 | 44.3 | 38.3 | 29.9 | 24.3 |
| Vanguard Total International Stock Index Fund | 27.1 | 27.1 | 27.1 | 27.1 | 27.1 | 26.0 | 23.7 | 21.6 | 19.3 | 16.8 | 13.2 | 9.2 |
| Vanguard Total Bond Market Index Fund | 9.9 | 9.9 | 9.9 | 9.9 | 9.9 | 14.0 | 21.5 | 29.0 | 36.4 | 39.8 | 41.6 | 44.7 |
| Vanguard Inflation-Protected Securities Fund | 5.1 | 13.6 | 19.9 | |||||||||
| Vanguard Prime Money Market Fund | 1.7 | 5.0 |
2015 target retirement changes
On February 26, 2015, Vanguard announced "the international equity allocation for both types of funds [target retirement funds and LifeStrategy funds] will increase from 30% to 40% of equity exposure, and the international fixed income allocation will rise from 20% to 30% of nominal fixed income exposure."[9] According to Vanguard, the changes were completed before the end of the 2015 calendar year.[10]
The following table shows allocations in the funds before the change, dating from June 2013.
| Holding | 2060 | 2055 | 2050 | 2045 | 2040 | 2035 | 2030 | 2025 | 2020 | 2015 | 2010 | Income |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Vanguard Total Stock Market Index Fund | 63.2 | 63.2 | 63.2 | 63.4 | 63.4 | 60.2 | 55.1 | 49.7 | 44.4 | 38.3 | 29.3 | 21.2 |
| Vanguard Total International Stock Index Fund | 26.7 | 26.7 | 26.6 | 26.5 | 26.5 | 25.1 | 22.7 | 20.6 | 18.4 | 15.7 | 12.1 | 8.9 |
| Vanguard Total Bond Market II Index Fund | 8.1 | 8.1 | 8.1 | 8.1 | 8.1 | 11.8 | 17.8 | 23.7 | 29.8 | 32.2 | 35.4 | 39.6 |
| Vanguard Total International Bond Index Fund | 2.0 | 2.0 | 2.1 | 2.0 | 2.0 | 2.9 | 4.1 | 5.8 | 7.4 | 9.2 | 11.8 | 14.1 |
| Vanguard Short-Term Inflation-Protected Securities Index Fund | 4.6 | 11.4 | 16.2 |
Notes
- ↑ You can find continuous updates of these figures at Vanguard Institutional, or at Target Retirement Income and click on the Portfolio tab and Export Data.
See also
- Vanguard SEC listings
- Target date funds
- Approximating Vanguard target date funds
- Glide paths
- Three-fund portfolio
References
- ↑ "Vanguard Target Retirement Funds". Vanguard. Retrieved September 10, 2023.
- ↑ "EDGAR Search Results". SEC. Retrieved September 10, 2023.
- ↑ "Vanguard press release". Vanguard. 2006.[dead link]
- ↑ Bogleheads forum topic: "Vanguard:Changes In Target Retirement Funds". September 27, 2010
- ↑ "Vanguard adjusts international equity exposure in Target Retirement Funds and other balanced funds". Vanguard.[dead link]
- ↑ "Vanguard streamlines construction and improves diversification of Target Retirement Funds". Vanguard. October 5, 2010. Archived from the original on October 20, 2010.
- ↑ "Vanguard cuts fund minimums, opens door to new investors". Vanguard.[dead link]
- ↑ "International bond index fund and ETF now available". Vanguard. June 14, 2013.[dead link]
- ↑ "Vanguard enhances diversification for target date funds and other all-in-one funds". Vanguard. February 26, 2015.[dead link]
- ↑ "Vanguard increases international equity, bond allocations in target-date funds". Pensions & Investments. Retrieved September 10, 2023.
External links
Forum discussions
- Bogleheads forum topic: "Glide path for Target Retirement funds"
- Bogleheads forum topic: "Bond allocation - are Target Retirement Funds too aggressive"
Institutional research
- "Vanguard's approach to target-date funds" (PDF). Vanguard Research. October 11, 2010. Archived from the original (PDF) on March 23, 2012.
- "Bond diversification in Vanguard Target Retirement Funds". Vanguard Research. November 28, 2014.[dead link]
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