How Much Does The Fund Cost
Vanguard Target Retirement 2050 doesnt charge a load or other upfront fees. Annual expense ratios are 0.16%, or $16 per year for every $10,000 invested in the fund. Investors have to have an initial investment of $1,000 per Vanguards rules, which apply to regular taxable accounts, as well as IRAs, or other specialized account types.
Backtesting Target Date Funds
For a performance comparison of the funds, well be using Portfolio Visualizer. This site is great for backtesting portfolio options and provides a number of useful metrics for weighing funds. The data set will be limited by the age of the newest target-date retirement fund, but we have a reasonable length of time to compare the funds.
The 3 funds compete very closely with one another. The Fidelity fund ultimately wins out by only a couple hundred dollars. The standard deviation of the funds, a measure of portfolio volatility, is fairly uniform from fund to fund. The same goes for the maximum drawdown period of the funds. Safe to say, any of the three funds are reasonable and comparable options.
The M1 Finance fund has had similar return and risk characteristics.
Best Target Date Retirement Fund : Vanguard Target Retirement 2045 Fund Investor Shares
If 2045 is your target then you sit somewhere midway in your career. At this point, investors look to hold a bit more bonds than those with more years to go. The Vanguard 2045 fund comes out as the top pick due to the lower fees and consistent historical performance. The mix of equities varies from the 2050 fund by only a few percentage points across categories.
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A Portfolio That Adjusts As Participants Careers Progress
At Voya, our glide path relative to peers has a higher equity allocation for younger participants to build wealth and a lower equity allocation for participants near and in retirement to reduce risk in those critical years. Younger participants can afford to take on more investment risk in exchange for greater potential returns. However, in the later years, participants are more vulnerable to a market downturn, particularly the day they retire.
The Portfolio may periodically deviate from the Target Allocation, generally within the range of +/- 10% relative to the current Target Allocation. The sub-adviser may determine to deviate by a wider margin in order to protect the Portfolio, achieve its investment objective, or to take advantage of particular opportunities. This chart is for illustrative purposes only and may not reflect the current allocations of the Voya Target Solution Trust Series. This illustration is intended to show how the Voya Target Solution Trust Series transitions over time.
State Street Target Date Retirement Funds
State Streets 2050 target date retirement fund, ticker SSDLX, makes a strong impression with only a 9 basis point expense ratio. Its one of the least expensive options available today.
Its asset allocation is similar to Vanguards.
The Portfolio tab shows us the fund is invested 51% in U.S. stocks, 35% in international stocks, and about 10% in bonds. The holdings of the fund reveal more similarities to its Vanguard counterpart. It invests the fund in six index funds.
Three stock funds and two bond funds substitute for the inverse with Vanguards offering. The U.S. stock portion of the fund is split into an S& P 500 large blend fund and a mid-cap growth fund. Still, State Streets fund should perform in line with Vanguards, with the added benefit of the lower expense ratio we saw earlier.
- Website: State Street
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What Are Target Date Funds
Target date funds invest in assets which match the recommended risk preferences of investors with their intended retirement date. Depending on the age at purchase, the mix of underlying assets can comprise various allocations toward stocks and bonds.
Please note all funds are not the same. Most follow a similar strategy:
However, despite these simple steps, these funds can differ dramatically. This includes the investments held in each fund, various levels of fees associated with the fund and underlying investments, and even what happens with the investments from present to target date and beyond .
In fact, some funds cease the transition to more conservative investments at the target date while others transition slower and continue shifting toward more fixed-income/cash allocations. The advantage of the latter would be more potential for growth into your retirement years.
For target date funds to qualify as one of the best investments for young adults, Id only consider the latter since continued portfolio growth in our later years is important.
I say this because as things currently stand, we might not have as many retirement resources as our parents and grandparents with Social Security and Medicare currently slated to run out of money before we retire.
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How Do Target Date Funds Work
Target date funds offer the simplicity of investing in one product and having the asset allocation change over time as you age.
This allows for a transition from more stocks to more fixed-income and cash-equivalent investments to match your recommended risk levels by age.
This transition, referred to as the glide path, can help investors who do not pay close attention to their retirement holdings across time.
An investor need only select the fund best-matched to their intended retirement date and hold the investment.
This results in better tax consequences and eases concern by not needing to worry about rebalancing, asset selection, or any other investing due diligence.
Are Target Date Funds Actively Managed
Target date funds provide a simplified way to save for retirement. They offer exposure to a variety of asset classes, markets, and active and passive management .
Regarding the active vs. passive management component, investors need to remain aware of the assets held in the target date funds.
Said differently, despite the simplicity of these investments, investors must should be conscious of the underlying asset allocation, fees, and portfolio risk of their target date investments.
In fact, some fund companies offer two type of target date investments: target date funds and target date index funds.
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What Is A Target Date Fund
A target date fund is simply a mutual fund that is designed to be the “appropriate” allocation of risk/reward based on the retirement date listed on the fund. For example, a Target Date 2040 Fund is supposedly designed to be the appropriate allocation of stocks and bonds for someone who is going to retire in 2040, which over 15 years away. This fund would most likely invest more heavily in bonds, and less in stocks, than say, a Target Date 2050, where the retirement age is almost 25 years away.
It is important to look at how these funds are made up: stocks, bonds, cash, or even real estate and commodities, can make up a fund. In fact, some of these funds are even funds of funds, meaning that for the stock percentage, they may invest in a stock mutual fund, and for the bond percentage, own a bond fund.
It is also important to note that these funds don’t offer any guarantees. Yes, they put a date on the fund. But that date really means nothing. It’s not the date when your money is ready. It is simply the date that the fund chose to base its risk/reward model off of. Thus, you are still exposed to risk in these funds.
The Vanguard Target Retirement 2055 Fund
The Vanguard Target Retirement 2055 Fund offers life-cycle asset allocation for investors with long-term retirement dates. This fund is attractive for investors who started their careers in recent years and have over 30 years before retirement.
As the fund is still far from its target date, 89.01% of its assets are allocated to domestic and international stocks. The remaining 10.99% of its assets are split between U.S. and international bonds. The fund is likely to stick to such aggressive allocation until 2030-2035. after that, it will start smoothly adjusting its allocation every year toward bonds.
The Vanguard Target Retirement 2055 Fund has an expense ratio of 0.08%, as of February 12, 2022, and a four-star rating from Morningstar. Its 10-year return is 10.21% and it’s minimum investment is $1,000.
This fund is most appropriate for investors who desire automatic asset rebalancing at a low cost and who are not planning to retire until between 2053 and 2057.
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Vanguard Target Retirement 2040 Fund
The Vanguard Target Retirement 2040 Fund is best suited for investors planning to retire between 2038 and 2042, and its minimum initial investment is $1,000.
The fund was issued on June 7, 2006, and has generated an average annual return of 8.32% since its inception. According to Vanguard, the fund also has an annual expense ratio of just 0.14%. The fund has $33.1 billion in net assets, of which about 80% are held in stocks and 20% are held in bonds.
The Vanguard Target Retirement 2040 Fund is also considered a moderate-to-aggressive fund. However, as with the 2030 fund, the Vanguard Target Retirement 2040 Fund will become more conservative over time as the allocation of assets in the fund change. Similarly, this fund is also best for people who want to invest for 10 years or more.
Best Funds For Your Retirement
- Publish date: Dec 16, 2011 6:30 AM EST
In order to prepare for a retirement 30 years from now, take a look at the best rated asset allocation funds targeted for a retirement in the year 2040.
NEW YORK (
) — TheStreet.com Ratings reviews the risk-adjusted return performance of around 25,000 funds every month. There is no time like the present to select from among the best rated asset allocation funds to build a retirement nest egg.
If you are planning to retire in about 30 years, take a look at the following funds targeted for a retirement in the year 2040. Each of the fund families offers additional funds with a variety of retirement dates attempting to match your particular retirement date goal. The benefit of holding a target date fund is that, over time, the allocation of the portfolio becomes more conservative by shifting from stocks to bonds.
Here are the 10 best 2040 retirement funds:
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T Rowe Price Target Date Funds
Another option is T. Rowe Price, which provides Retirement Funds at similar price points to Fidelitys Freedom Funds. The company shows expense ratios ranging from 0.45%-0.64% .
My previous employer partnered with T. Rowe Price for our 401 plan and would default new employees into these target date funds when retirement benefits began accruing.
Many employees likely remained in these funds with their retirement contributions.
Are Target Retirement Funds Only For Retirement
There may be many times in the future when we know we will need to draw on our savings and retirement is just one of these. In the introduction we mentioned others based on the needs of our children . Some are a bit more uncertain. For example can we guess when our children will get married? If so it might make sense to invest for this happy, but somewhat fraught, future date.
But the point is that Target Retirement Funds are not only for retirement. They might be better branded as Target Date Funds.
In fact, you can use target date funds to build your own cheaper version of a robo fund like Nutmeg and Moneyfarm. To learn more here’s our course:
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Fidelity Freedom Index Funds
The final fund is Fidelitys Freedom Index 2050 Investor, ticker FIPFX. The exact naming of this fund is important to note. FIPFX has the word index in the fund name. Fidelity offers another Freedom 2050 target-date fund, but the underlying holdings consist of actively managed mutual funds.
As a result, that fund charges 75 basis points in fees. In contrast, the Freedom Index fund only charges 12 basis points . That expense ratio puts the Fidelity fund in between State Streets and Vanguards options.
The asset allocation of this fund is nearly identical to the Vanguard, State Street and M1 Finance Moderate funds.
Nothing surprising jumps out53% of the fund is allocated to U.S. stocks and 37% to international stocks. Bonds fill out the remaining 10%.
The holdings of the fund shouldnt shock anyone either. Fidelity uses Fidelity index funds to implement its asset allocation.
Overall, another sensibly arranged portfolioDiversified, low-cost, and convenient.
- Website: Fidelity
Target Date Funds Alternative
As an alternative, you can use a service like M1 Finance, which uses index funds and other stocks to replicate this same portfolio transition over time depending on stated financial goal.
Personally, my wife and I have looked into using M1 Finance for our IRA funds and setting a glide path which will transition our assets from primarily stock-based to fixed income as we age.
If we choose to use target date retirement funds, we will aim to use the through target date fund methodology because my wife and I will want more exposure to equities in the long-term than fixed income.
In the later years, we will want more money to transition to fixed income as we retire completely and have need for income as opposed to capital appreciation.
Consider Investing In Target Date Funds With A Axos Self
- Available via desktop, Apple iOS and Android App on Google Play
- Best For: Self-directed investors currently banking with Axos
Axos Self-Directed Trading offers commission-free investing options, including mutual funds. Among these choices are several target date funds from providers like Vanguard, Fidelity, T. Rowe Price and more.
The advantage of investing with Axos SDT is the free trading outside of these companies securities and in other assets as well.
Holding an investment account with Vanguard allows for free trades of Vanguard funds, but comes with commissions for other stocks and bonds you trade. The same is true of T. Rowe Price.
Many options exist like index funds on Robinhood, or on the best Robinhood alternatives which offer free stocks for opening accounts, but Axos SDT provides access to a broader universe of investment options.
And with all investments, investors should consider the investment objectives, risks, and charges and expenses of a mutual fund or ETF carefully before investing.
About the Author
Riley Adams is a licensed CPA who works at Google as a Senior Financial Analyst overseeing advertising incentive programs for the companys largest advertising partners and agencies. Previously, he worked as a utility regulatory strategy analyst at Entergy Corporation for six years in New Orleans.
Target Date Funds Vs Index Funds
Fund companies can offer two types of target date funds:
The former provides active fund management opportunities while the latter is primarily passive in nature.
The active component results in higher expense ratios because this utilizes active managers who attempt to beat their relevant benchmark through stock picking or discretionary fixed-income selection.
Personally, I prefer the passive options for their cost and the removal of human emotion when it comes to decision-making.
Having made some of my worst investing mistakes thinking I could beat the market, I opt for avoiding the uncompensated risk.
Regardless of choice, both types of funds offer diversification, asset allocation optimization, and rebalancing to keep on track if markets change.
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Target Date Retirement Funds In 401 Accounts
If target-date retirement funds are starting to seem like attractive options, it might be worth considering holding a target date fund in a 401k if one is available to you. Since company 401 plans often invest hundreds of millions at a time, mutual fund providers may offer companies an expense ratio discount to attract their business.
For example, ticker FRLPX is the Fidelity Freedom Index 2050 option offered in my 401 at Forbes. This version of the fund has the same asset allocation, holdings, and glide path but charges half the fees of the non-401 investor class fund.
I mention this industry convention not only to highlight the fee difference but also to prevent any confusion when picking funds in a 401. If theres any doubt as to whether one fund mirrors another, its best to check the Portfolio tab on the Morningstar listing for both funds and make sure the only difference is the expense ratio.