What Tax Impact Does This Have
There are two main categories of investment accounts:
If you hold these funds in a tax advantaged retirement account, this capital gains payout has zero tax impact on you. Thats because tax advantaged accounts arent tax on gains or distributions along the way. Theyre only taxed on your income at the beginning or the withdrawals at the ends .
If you hold these funds in a regular/taxable brokerage account, this will impact your taxes. Early in 2022 youll receive a 1099-DIV tax form that reports your dividends and capital gains distributions for the year. Heres a look at mine from 2020. Note that it only shows $1.40 in capital gains for 2020.
When I receive my 2021 1099-DIV it will show a much bigger number in the capital gain box. I will owe tax on that gain for 2021, but at the lower long term capital gain rate. Since my fund actually DID go up in value that much I could simply sell some of my shares to cover that tax burden. Additionally, since thats an actual gain its going to be due one day when you sell your investment. Getting taxed sooner rather than later represents a slight tax inefficiency, but generally doesnt have a large impact on the long term growth of your investment.
What Is A Target
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.
Notes & Data Providers
Stocks: Real-time U.S. stock quotes reflect trades reported through Nasdaq only comprehensive quotes and volume reflect trading in all markets and are delayed at least 15 minutes. International stock quotes are delayed as per exchange requirements. Fundamental company data and analyst estimates provided by FactSet. Copyright © FactSet Research Systems Inc. All rights reserved. Source: FactSet
Indexes: Index quotes may be real-time or delayed as per exchange requirements refer to time stamps for information on any delays. Source: FactSet
Data on U.S. Overview page represent trading in all U.S. markets and updates until 8 p.m. See Closing Diaries table for 4 p.m. closing data. Sources: FactSet, Dow Jones
Stock Movers: Gainers, decliners and most actives market activity tables are a combination of NYSE, Nasdaq, NYSE American and NYSE Arca listings. Sources: FactSet, Dow Jones
ETF Movers: Includes ETFs & ETNs with volume of at least 50,000. Sources: FactSet, Dow Jones
Bonds: Bond quotes are updated in real-time. Sources: FactSet, Tullett Prebon
Currencies: Currency quotes are updated in real-time. Sources: FactSet, Tullett Prebon
Cryptocurrencies: Cryptocurrency quotes are updated in real-time. Sources: CoinDesk , Kraken
Calendars and Economy: ‘Actual’ numbers are added to the table after economic reports are released. Source: Kantar Media
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Dedication To Improving Retirement Outcomes
Vanguard’s unique investor-owned structure enables the firm to return value and pass on economies of scale to Target Retirement investors in the form of lower-costs, expanded access, and continued innovation of the series.3 As part of Vanguard’s commitment to further improving investors’ retirement outcomes, Vanguard announced a series of enhancements to its Target Retirement lineup and retirement income capabilities which are expected to result in $190 million in savings to Target Retirement investors.
Investments in Vanguard Target Retirement Funds and Trusts are subject to the risks of their underlying funds. The year in the fund or trust name refers to the approximate year when an investor in the fund or trust would retire and leave the workforce. The fund or trust will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. Vanguard Target Retirement Income Fund and Trusts and Vanguard Target Retirement Income and Growth Trusts have fixed investment allocations and are designed for investors who are already retired. An investment in a Target Retirement Fund or Trust is not guaranteed at any time, including on or after the target date.
Notes:
All investing is subject to risk, including the possible loss of the money you invest.
Vanguard Marketing Corporation, Distributor.
Which Target Retirement Fund Fits Your Timeline
Use our table to find the fund that best fits you.
Fund name
*Vanguard Target Retirement Funds average expense ratio: 0.12%. Industry average expense ratio for comparable target-date funds: 0.55%. All averages are asset-weighted. Industry averages exclude Vanguard. Sources: Vanguard and Morningstar, Inc., as of December 31, 2020.
Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date.
These fund suggestions are based on an estimated retirement age of approximately 65. Should you choose to retire significantly earlier or later, you may want to consider a fund with an asset allocation more appropriate to your particular situation.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. Investments in bonds are subject to interest rate, credit, and inflation risk.
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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 , 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.
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Why Did This Happen
If you look at the distributions page for a target retirement fund, youll see it pays out distributions annually. For VFIFX, in 2020 there was a $0.0184 per share long term capital gain distribution, or about 0.04%. In 2021 that same distribution was $4.8325 or 10.3%.
Thats over a 250X increase year over year in long term capital gains distributions. That huge distribution is why we saw the share price tank on 12/29/2021.
That said, the why is a little harder to answer. I called Vanguard to ask them and wasnt satisfied with their answer. They said the reasons are:
- Underlying investments did far better
- Securities turned over
- Bonds matured, replaced
The investments did better answer is basically nonsense. Sure 2021 was a great year for the market, but so was 2020. And it certainly doesnt explain a 250X increase. Securities turned over is likely the reason, but that really doesnt get at the heart of why.
My theory is that there was some big internal churn for some reason. i.e. Lets say a huge company that uses Vanguard for their 401ks wanted to switch funds or leave Vanguard or something. To cash them out, Vanguard would have to sell a huge chunk of the underlying funds in order to fund those withdrawals. Those sales may have triggered the capitals gains distributions we see here. But truth be told, that theory is pretty speculative and I havent been able to get a straight answer from anything Vanguard provides. If anyone knows, please share!
Vanguard Target Retirement Funds
The Vanguard Target Retirement Funds offer one-stop shopping for those seeking a simple approach to retirement investments.
These funds:
- Have built-in diversificationby investing in major asset classes such as bonds, US stocks, international stocks, real estate, and commoditiesthat endeavor to manage risk and performance over time.
- Are managed to become more conservative as the fund get closer to your retirement date, gradually shifting the funds investments from higher-risk to lower-risk investments.
- Are managed by professionals, whose objectives are to manage your portfolio, with the goal of creating a mix of risk and return appropriate to each stage of your life.
- Are one of the lowest-fee target-date funds currently available.
The target-date funds are offered in five-year increments. You invest in a fund according to your current age, as follows:
| If You Were Born |
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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
- Vanguard Total Bond Market II Index Fund
- Vanguard Total International Stock Index Fund
- Vanguard Total International Bond Index Fund
- Vanguard Short-Term Inflation-Protected Securities Index Fund
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.
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Vanguard To Launch Target Retirement 2070 2015 Vintage Retiring
Vanguard today announced plans to launch Vanguard Target Retirement 2070 Fund and Vanguard Target Retirement 2070 Trusts. The newest vintage in Vanguard’s industry-leading Target Retirement lineups, 2070 is designed to provide the youngest members of the workforce with an all-in-one, low-cost portfolio option as they begin saving for retirement.1
“Vanguard Target Retirement sets a solid foundation for young investors as they begin their retirement journey by providing a broadly diversified, professionally managed, indexed-based investment portfolio that encourages long-term discipline and seeks to deliver risk-adjusted returns over time,” said John James, managing director and head of Vanguard Institutional Investor Group.
The 2070 vintage is designed for younger investors whose long time horizons may enable them to withstand equity market risk and benefit from decades of potential growth and compounding. Informed by more than four decades of investment management expertise and behavioral research, Vanguard Target Retirement’s glidepath begins with a significant equity allocation . Over time, as an investor approaches retirement, the glidepath incrementally decreases exposure to equities and increases exposure to fixed-income investments. The portfolio reaches its most conservative allocation seven years after retirement . Vanguard Target Retirement 2070 Fund and Vanguard Target Retirement 2070 Trusts will launch by mid-2022 with the following asset allocation:
How Vanguard Target Date Retirement Funds Work
Vanguard Target Retirement Funds, a Target Date asset allocation option, are designed to take you through retirement.
The asset mix of each Portfolio is based on a target date. This is the expected year in which participants in a Portfolio plan to retire and no longer make contributions. A team of asset allocation professionals adjusts each Portfolios make-up over time to ensure a noticeable and steady shift from equities to fixed income in the years leading to retirement.
The Vanguard Target Retirement Funds are composed of passively managed funds and are managed to help retain your potential for growth, and aim to preserve the value of your assets at and after retirement.
As each Portfolio glides over time, its asset mix is adjusted. Looking at the image below:
- Designed to take you through retirement.
- Glidepath is designed to continue to generate income in the years after the retirement date.
- The most conservative point on the glide path occurs 7 years after the retirement date.
- Underlying portfolio is comprised of 100% index funds.
- Vanguards embedded diversification approach provides balance against the natural ups and downs in the market.
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The Vanguard Target Retirement 2055 Fund
The Vanguard Target Retirement 2055 Fund offers lifecycle asset allocation for investors with specific retirement dates. This fund is most attractive for investors who just started their careers and have over 40 years before retirement. As the fund is very far from its target date, 90% of its assets are allocated to domestic and international stocks. The remaining 10% 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 0.15% and a four-star rating from Morningstar. 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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What You Need To Know
- Vanguard opened its Institutional Funds to all retirement plans with at least $5M, causing a wave of redemptions that forced the Retail Funds to sell assets.
- Those asset sales left retail investors with huge realized capital gains, according to the suit.
- The suit alleges that Vanguard intentionally caused the unprecedented selloff.
Vanguard is embroiled in a class-action lawsuit over a selloff that investors likened to an elephant stampede from its target date funds that left retail investors to take a huge capital gains tax hit.
As the Wall Street Journal reported in January, the selloff involved multimillion-dollar corporate retirement plans getting out of the standard target funds and into the Institutional equivalents.
According to the class-action lawsuit, filed Monday in the U.S. District Court for the Eastern District of Pennsylvania, in December 2020, to cater to retirement plans, Vanguard intentionally caused an unprecedented sell-off from its Retail Funds.
The suit was filed by retail investors Valerie M. Verduce, Catherine Day and Anthony Pollock, on behalf of the class.
Normally, the lawsuit states, target date funds dont sell many assets, so capital gains distributions are minimal. But beginning in December of 2020, Vanguard itself caused an elephant stampede sell off from its retail target date funds.
This is what happened:
This move didnt hurt retirement plans, but it left taxable investors holding the tax bag, the lawsuit says.
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Best Vanguard Target Retirement Funds
Eric is currently a duly licensed Independent Insurance Broker licensed in Life, Health, Property, and Casualty insurance. He has worked more than 13 years in both public and private accounting jobs and more than four years licensed as an insurance producer. His background in tax accounting has served as a solid base supporting his current book of business.
Deciding which mutual funds are appropriate for a retirement portfolio requires a good understanding of investment strategies. Vanguard target-date funds do the work of rebalancing over time so investors don’t have to. They start with an allocation favoring stocks in the early years of an investor’s life cycle, typically 90% stocks and 10% bonds.
As an investor approaches his retirement age, Vanguard gradually rebalances its asset allocation in favor of less risky securities, such as bonds and short-term reserves. Vanguard target-date funds come with an average expense ratio of 0.10%. The industry average expense ratio for comparable target-date funds is 0.60%. Beginning in February 2015, Vanguard increased the international equity and fixed income allocations for its target-date funds to provide investors with improved global diversification.
