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Vanguard Target Retirement Funds Breakdown

 Vanguard is credited with creating the first index fund founded by John (Jack) Bogle.  To make it easier for investors, Vanguard created Target Retirement Funds that provide an All-in-one fund for people to choose based on their target date of retirement.  For each of the group of ages, the portfolio has a different composition designed to help manage risk while trying to grow retirement savings.  It will gradually move assets to less risky investments as retirement age gets closer. (source: https://investor.vanguard.com/mutual-funds/target-retirement/#/)

Vangaurd Target Retirement Funds

Breakdown Points

  • Major Asset Allocation Breakdown
    • Stock allocation decreases as retirement target date approaches
      • With 45 years to retire, the portfolio had more than 88% stocks (53% US, 35% International)
      • In retirement, the portfolio had slightly more than 29% stocks (17% US, 12% International)
    • Bond allocation increased as retirement target date approaches
      • With 45 years to retire, the portfolio had just almost 10% bonds (7% US, 3% International)
      • In retirement, the portfolio had almost 53% bonds (37% US, 16% International)
    • Money Market and Inflation Notes
      • roughly 2% and in retirement 8-16% in Inflation Notes   
  • Assumes stocks are more risky than bonds
    • more than 1/2 the equity and bond contribution goes to US
  • Simple return estimates (assuming Money Market and Inflation Notes don't return anything and stocks return 8.2% and bonds 4.5%)
    • 45 years to go: 88%x8.2% Stocks + 10%x4.5% Bonds = > 7.7% return
    • in retirement: 29%x8.2% Stocks + 53%x4.5% Bonds => 4.8% return
  •  Has historically done well as US stocks have outperformed global stocks and bonds also did well as yields fell.  But it is not guaranteed these trends will continue
  • For most people this is probably has satisfied their investment objectives.  The nice thing about these products is that it makes it very simple for users and does offer slight tailoring based on age.
  • Some drawbacks: the allocation doesn't do any alternative allocations, assumes risk is correlated to age, doesn't take into account size of account (investing $10,000 is different than $100,000), doesn't use any modern portfolio tools like options to reduce cost basis or portfolio insurance, doesn't consider what the assets role will be after the person passes (e.g. supporting younger heirs may want to consider a different risk allocation that is geared for generational wealth), not really efficient use of capital.
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