The purpose of a target retirement is that you can put your investments on autopilot and have the fund manager handle it all for you – you can go do something else while someone is analyzing your investment mix and rebalancing. The latest question to Walter Updegrave’s column on whether a near retiree has the right approach drives home the point that target retirement funds are meant to operate alone – not as a supplement to something else.
In the question, the reader, Vivian, has two Target Retirement funds and a Roth IRA consisting primarily of bonds. The problem, as Walter notes, is that Vivian is just making things way too complicated with two retirement funds and a Roth full of bonds.
First off, having two target retirement funds is redundant and unnecessary – if you are picking two target retirement funds because you want a percentage mix between the two, you’re probably analyzing the funds way too closely and you probably don’t want those types of funds in the first place. While I don’t personally thinks it’s a huge deal, if you don’t have a lot in those accounts, you might be hit with low balance fees. For example, if you have a Vanguard Target Retirement fund and your balance is under $5,000, you’re probably going to be paying a fee of $10 a year for each fund.
Second, the target retirement funds may be redundant with your other offerings as well. If you want a mix of 80% stocks and 20% bonds, you might hit that mix with your target retirement fund choice but your other funds will mess up that mix. If you have a fund that matches the S&P 500 Index, then your retirement portfolio will have a stock allocation percentage higher than your intended 80% – though you might not care.
Ultimately, while target retirement funds are designed to be used alone, I don’t see how anyone could just pick one fund and go with it for every single retirement dollar they have saved away. Personally, I have most of my Rollover IRA in a Target Retirement fund at Vanguard but my Roth IRA consists of stock investments and I’m okay with that, knowing full well the point of target retirement funds.