The power behind Target Retirement Funds
Target Retirement Funds represent an alternative for investors who want a broadly diversified portfolio for their retirement savings but don't want to do the rebalancing themselves. A Target Retirement Fund will—automatically—rebalance over time via its glide path. This is the key behind a Target Retirement Fund.
The glide path essentially shows how a specific Target Retirement Fund’s asset mix will change over time as an investor moves closer to retirement. It’s a smooth and gradual transition—from a mix that’s heavily weighted in stocks to one that is predominantly weighted in bonds and eventually short-term reserves—over an investor’s life.
All investing is subject to risk. 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 (the target date) 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 the Target Retirement Fund is not guaranteed at any time, including on or after the target date. Investments in bond funds are subject to interest rate, credit, and inflation risk. Diversification does not ensure a profit or protect against a loss in a declining market.
A Target Retirement Fund in action
Suppose you are just entering the workforce and have 45 years or so before you retire. Depending on your situation, you could afford to be more aggressive in your asset mix because you have a long time to go before retirement. In this case, Vanguard Target Retirement 2055 Fund could be one suitable option because of its heavy weighting in stocks.
However, as you move through your investing life and nearer to retirement, you might want to consider a more conservative asset. Most investors try to preserve the savings they’ve built up as they get closer to retirement. So, following from the example above, the Target Retirement 2055 Fund will gradually shift its allocation from mostly stocks to more conservative bonds, and eventually short-term reserves, the closer you get to retirement. Although the fund’s allocation will adjust automatically, you should still check the allocation of your fund to ensure that it’s suitable for your present situation.
The bottom line is that the glide path approach helps ensure that you have more stocks in your portfolio now and more bonds and short-term reserves later—although the stock portion of the fund’s asset mix will never fully go away, even after you’ve entered retirement.
As an investor, you do not have to manage this change. The investment professionals behind a Target Retirement Fund will do it automatically for whichever Target Retirement Fund your money happens to be in.
Investing for retirement