The Vanguard Target Retirement 2030 Fund (VTHRX -0.50%) is a target-date, or lifecycle, retirement mutual fund designed for investors planning to retire between 2028 and 2032. A popular 401(k) and IRA fund for investors about 15 years from retirement, the fund has a healthy stock/bond mix, and a low expense ratio.
What is a target-date fund?
A target-date fund, also known as a lifecycle 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 have relatively high volatility.
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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 2030 Fund
Based on an average retirement age of 65, the Vanguard Target Retirement 2030 Fund is intended for people who are between 49 and 53 in 2016, although this can vary for those who plan to retire earlier or later than average.
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 Vanguard's other index funds. Because of this passive approach, the only expenses associated with the fund are the 0.15% in expense ratios passed through from the index funds.
As of May 31, 2016, here are the investment funds used by the Vanguard Target Retirement 2030 Fund and their respective allocations:
- Vanguard Total Stock Market Index Fund (44.3%)
- Vanguard Total International Stock Index Fund (29.4%)
- Vanguard Total Bond Market II Index Fund (18.3%)
- Vanguard Total International Bond Index Fund (8%)
When you add up these allocations, you'll see that the fund is approximately 74% stocks and 26% bonds. This makes sense: While the fund's target investors are getting close to retirement, growth is still the priority -- hence, the large stock allocation.
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 Target Retirement Income Fund. That fund is a 30%/70% mix of stocks and bonds, and is considered (by Vanguard) to be an appropriate mix for a retiree.
This mix will be achieved around 2037, so over the next 21 years, the stock allocation will decline by 45 percentage points. In the meantime, we can predict what the fund will look like based on the allocations of other Vanguard target-date funds.
|
Target Retirement Date |
Current Stock Allocation (%) |
Current Bond Allocation (%) |
Acquired Expense Ratio (%) |
Years Until 2030 Fund Has This Allocation (Approximate) |
|---|---|---|---|---|
|
2030 |
74% |
26% |
0.15% |
0 |
|
2025 |
67% |
33% |
0.15% |
5 |
|
2020 |
59% |
41% |
0.14% |
10 |
|
2015 |
49% |
51% |
0.14% |
15 |
|
2010 |
34% |
66% |
0.14% |
20 |
|
Vanguard Target Retirement Income Fund |
30% |
70% |
0.14% |
21 |
Data Source: Vanguard Target Retirement Funds Prospectus (January 28, 2016).
We can assume that, in five years, the 2030 target-date fund will roughly look like the 2025 fund does today. The same concept works for any other fund on the chart. While it's impossible to predict the exact allocation at any given time, this is a good idea of how the 2030 target-date fund's asset allocation will change over time.
A one-stop investing solution for you?
Like all target-date funds, the Vanguard Target Retirement 2030 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.
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 2030. That doesn't necessarily mean it will fit your investment goals and risk tolerance.
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 2025 target-date fund. Or if you have a higher risk tolerance, you may want to consider a fund whose target date is 2035, or even 2040, in order to maintain a high level of 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.