Each Target Retirement Trust invests in several Vanguard funds, primarily low-cost index funds, to create a broadly diversified mix of stocks and bonds. The year in a Target Retirement Trust’s name is its target date, the approximate year in which an investor in the trust expects to retire and leave the workforce.
A Target Retirement Trust will hold more stocks the further it is from its target date, seeking stocks’ higher potential growth. Stocks also have the highest risk of loss. To reduce risk as the target date approaches, Vanguard’s investment managers will gradually decrease the trust’s stock holdings and increase its bond holdings. Bonds usually have a lower risk of loss, though they also have lower potential gains.
Keep in mind that a Target Retirement Trust is subject to the risks of its underlying funds. Its returns are not guaranteed, and investing in one does not ensure that you will have enough income in retirement. Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.