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.
4 responses to “Target Retirement Is Meant As Solo Offering”
Most of my retirement money is in a Target fund at Vanguard, but I also have a small amount in their emerging markets index fund. Does that sound good? I’m not sure why I decided to move some money in there, except that the Target 2035 fund didn’t seem to have a lot of exposure to emerging markets.
I’m afraid I don’t know because I’m not a financial planner or analyst or anything like that, I personally have the same thing going on (I have some in target retirement and emerging markets and some others) but Walter Updegrave would disapprove. 🙂
When I was reading the morningstar writeup on TRowePrice 2040 (TRRDX), which is where I have my Roth IRA, the article addressed this in a way. They were talking about TRRDX, but I don’t see why it couldn’t apply to Vanguard or whatever.
Anyway, the comment was that in order for the asset allocation of the lifecycle to work properly, it was really intended to be the sole holding, but if it were not, that it should be at least 85% of the total holdings, meaning 15% or less could be in something else and not unduly compromise the lifecycle fund’s inherent asset allocation.
Based on what I know of the TRowePrice vs. Vanguard, my (totally unqualified!!) opinion is that TRRDX and VFINX, Vanguard’s 2045 fund, are fairly similar in makeup (though I do prefer TRRDX personally) and that it’s totally reasonable to want to have a little exposure to emerging markets outside of the Vanguard lifecycle fund.
Anyway, I think if you have a little bit in emerging markets and maybe one or two other places you’re ok, but I’d keep that 85/15 benchmark in mind.
Wow, thanks db!