Vanguard recognized an unmet need from investors for a simple, balanced investment fund to reach their retirement goals. Vanguard made an early entrance into the target-date fund arena by launching its initial selection of Vanguard Target Retirement Funds in 2003, eventually adding more target dates over later years.

Each fund in the target-date series holds an underlying mix of Vanguard index funds. Due to the composition of index mutual funds and the Vanguard management style, the Vanguard Target Retirement series of funds has a low expense ratio ranging from 0.16% to 0.18%.

The Strategy of Target-Date Funds

Target-date funds offer investors an easy way to own a diversified portfolio by making a single mutual fund selection that changes over the years to reflect the investor's capacity risk.

For a long-term target date, the fund comprises a more aggressive mix of underlying equity index funds in the early years. As the target date grows nearer, it is adjusted toward a more conservative mix. When a fund reaches its target date, the underlying portfolio will reflect that of the Vanguard Target Income Fund.

The funds do not guarantee a certain return at their end date, but they do automatically reduce the amount of risk in the portfolio as the date the funds will be needed draws nearer.

Vanguard Target Retirement Funds

The current lineup of Vanguard Target Funds includes the Vanguard Target Retirement Income Fund and Target Retirement Funds 2015, 2020, 2025, 2030, 2035, 2040, 2045, 2050, 2055, 2060, and 2065. The list begins with the most conservative fund and ends with the most aggressive fund. For example, the long-term horizon for the 2060 fund allows the portfolio to be heavily weighted in equities with a small percentage of bonds, while the 2015 fund would be mostly bonds and very few equities.

Vanguard Target Retirement Fund 2045

The Vanguard Target Retirement Fund 2045 is a good example of reviewing current performance and portfolio composition. The fund has a target date range of 2041 to 2045 and holds four Vanguard index funds. The underlying funds and weighting as of November 2019 are as follows:

  • 54.4% in the Vanguard Total Stock Market Index Fund 
  • 35.6% in the Vanguard Total International Stock Index Fund
  • 7.0% in the Vanguard Total Bond Market II Index Fund
  • 3.0% in the Vanguard Total International Bond Index Fund

Because the time horizon for this fund is 26 years, it holds more equity index funds and a small portion of bond index funds. Investors who plan to retire between 2043 and 2047 could consider this fund. If they want to take less risk, they can select from earlier target dates.

The November 2019 SEC yield for the fund is 2.10%. The inception of the fund was in 2003, so potential investors can consider the strength of the fund's performance over more than 10 years. The average annual return (AAR) for 10 years was 9.98%, and the fund has a four-star rating from Morningstar for its three- and five-year performance.

The Success of Vanguard Target Retirement Funds

Vanguard has found success with the series of target-date funds by offering a low expense version for the retirement market. The initial investment minimum is $1,000, so the funds appeal to individual investors and 401(k) participants. The Vanguard Group offers a well-managed fund selection with a strong performance history. The automatic rebalancing of the portfolio is also an important feature.

The Pension Protection Act of 2006 included target-date funds as a qualified default investment alternative (QDIA). Retirement plan sponsors can use these funds as a default investment for participants who do not make an investment election.

For investors who want a one-stop investment selection or a set-it-and-forget-it approach to investing in their retirement, the Vanguard Target Retirement Funds are an easy choice. They are especially appealing to young investors who are just starting a career and may not have the time or expertise to critique various investment choices.