The Vanguard Target Retirement 2020 Fund (NASDAQMUTFUND:VTWNX) is a target-date, or life-cycle, mutual fund designed for investors planning to retire between 2018 and 2022. A popular 401(k) and IRA holding among investors now getting close to retirement, the fund has a healthy stock/bond ratio, a solid record of performance, and will continue to shift its strategy over time to suit the needs of older investors who need a more conservative approach taken with their nest eggs.
What is a target-date fund?
A target-date fund, also known as a life-cycle or age-based fund, is intended to provide investors with one simple choice for retirement investing.
Stock-based funds have high long-term return potential but also relatively high volatility. On the other hand, bond funds are more stable, especially in terms of income, but don't have the long-term potential of stocks. Therefore, it's generally suggested that younger investors put most of their money into stocks and gradually shift their investments into bonds as they get closer to retirement.
Target-date funds automate this process for investors. Over time, they gradually shift their holdings from growth-oriented stock funds to a more income-oriented retirement portfolio of bonds.
The Vanguard Target Retirement 2020 Fund
Based on an average retirement age of 65, the Vanguard Target Retirement 2020 Fund is intended for people who are between 59 and 63 in 2016, although this can vary for those who plan to retire earlier or later than average. The minimum initial investment is $1,000, and subsequent investments in the fund can be as little as $1.00.
Like all of Vanguard's target-date funds, the investment structure is simple. Instead of buying a portfolio of stocks and bonds, this fund simply allocates its assets to five of Vanguard's index funds. Because of this passive approach, the only fees for investing in the fund are the 0.14% in expense ratio passed along from the underlying funds.
As of May 31, 2016, here are the investment funds and their allocations:
- Vanguard Total Stock Market Index Fund (35%)
- Vanguard Total Bond Market II Index Fund (27.9%)
- Vanguard Total International Stock Index Fund (23.3%)
- Vanguard Total International Bond Index Fund (12.2%)
- Vanguard Short-Term Inflation-Protected Securities Index Fund (1.6%)
In total, the fund has just over 58% of its assets in stock funds and the other 42% in bonds. In a nutshell, the fund's investors are getting close to retirement, so capital preservation and income are becoming more of a priority, but the slight majority of the focus is still to take advantage of the compounding power of stocks. This makes sense -- these investors won't rely on their investments for income for another few years, so it's not the portfolio's main focus just yet.
What the fund will look like in the future
According to Vanguard, the fund will continue to shift its asset allocation for seven years after the target date, at which point it will be identical to the Vanguard Retirement Income Fund. That fund is a 30%/70% mix of stocks and bonds and Vanguard considers it to be an appropriate mix for a retiree.
This mix will be achieved around 2027, so over the next 11 years, the stock allocation will decline by 28 percentage points. Looking at Vanguard's 2015 target-date fund now (in 2016), there's roughly a 50/50 mix of stocks and bonds, so that's what investors can expect around the time the 2020 fund reaches its target date.
A one-stop investing solution for you?
Like all target-date funds, the Vanguard Target Retirement 2020 fund is intended to be an entire diversified investment portfolio all in one fund. It can work well all by itself, or it can be used to supplement other high-quality mutual funds and stocks you may own.
And it's important to mention that there's no such thing as a one-size-fits-all investment fund. This one is designed for the average investor who plans to retire in 2020. If you prefer to be a little more conservative than average, you can choose a different fund that is already more bond-oriented, such as Vanguard's 2015 target-date fund. Or, if you have a higher risk tolerance, you may want to consider a fund whose target date is 2025, or even 2030, to maintain stock exposure for longer.
The point is that while Vanguard's target-date funds can be great choices, you still need to make sure the fund you choose fits into your own investment strategy and risk tolerance.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.