Target-date funds (TDFs) are the ultimate tool for anyone who wants to invest their money without all the work.
If you’re at all familiar with an investment fund, it will typically own a few hundred stocks or bonds for you. Own enough of those, and you’ve got yourself a portfolio. Well, a “balanced” (or “allocation”) fund goes one step further, owning stocks and bonds in some sort of preset proportion.
A target-date fund goes an additional step further, owning a ratio of stocks and bonds that’s appropriate for people of a certain age, then managing that portfolio to have fewer stocks and more bonds as time progresses and those people’s needs become more conservative in nature.
Throw Vanguard—one of the fund world’s low-cost leaders into the mix—and you have investing simplicity you can buy for a song.
Today, I want to introduce you to Vanguard’s target-date funds—the Vanguard Target Retirement series—as well as another Vanguard line of retirement mutual funds. I’ll start with a quick intro to TDFs, then help you better understand these Vanguard retirement products.
Disclaimer: This article does not constitute individualized investment advice. Individual securities, funds, and/or other investments appear for your consideration and not as personalized investment recommendations. Act at your own discretion.
What Is an Allocation Fund?
Most investment funds will own a single asset, usually stocks or bonds, but sometimes other categories such as commodities. An allocation fund (or balanced fund) allocates money to multiple assets: typically stocks, bonds, and cash. (Cash is often included in the bond category.)
An allocation fund will typically try to maintain a certain balance of stocks and bonds throughout its life. Morningstar breaks allocation funds into five categories depending on their exposure to equities:
- Conservative: 15% to 30%
- Moderately Conservative: 30% to 50%
- Moderate: 50% to 70%
- Moderately Aggressive: 70% to 85%
- Aggressive: 85%-plus
An allocation fund is in theory a great way to get all the stock- and bond-market exposure you need with just one fund.
But there’s an inherent problem: The right blend of stocks and bonds for a person who’s, say, 30 years old, is much different than the ideal mix for someone who’s in their 60s. You could, in theory, move your money into different funds over time, but that could have detrimental tax and cost-basis effects.
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What Is a Target-Date Fund?
Target-date funds are a type of allocation fund that has become popular in retirement planning over the past two decades. They go by different names, interchangeably called several things, including:
- lifecycle funds
- age-based funds
- dynamic-risk funds
The core concept is pretty simple: Target-date funds invest in a more aggressive portfolio of mostly equity funds to start, then gradually shift to a more conservative strategy, owning predominantly bond funds, as they approach a target date.
When you start investing, your target retirement date is really just going to be an estimate; you don’t know what the world will throw you over the next few decades, so there’s no need to be precise.
They’re almost predominantly found as mutual funds, though iShares has a series of target-date ETFs. Fund families usually create target-date funds in five-year increments (say, 2025, 2030, 2035, etc.). The math behind picking one is simple enough.
Example
Let’s say you turned 45 years old in 2025, and you expect to work until age 70. Your expected retirement date would be in the year 2050. So, investing in a target-date fund with a target retirement date of 2050 would be the most logical move.
What if your expected retirement age changes? No problem! Target-date funds are normal mutual funds and can be bought or sold as your needs change.
The target-date fund’s allocation to equities will generally never go to zero. Retirees need growth, too, so you’ll almost certainly have at least a little exposure to the stock market. The beauty of the target-date fund is that it changes your asset allocation to match your risk tolerance as you age—and it does it automatically without requiring you to actually do anything.
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What Is Asset Allocation?
A lot of investors (and particularly young investors) dream of making a killing picking stocks. And that’s fantastic. Stock picking is stimulating and, if done well, can add some zeros to your net worth!
When push comes to shove, however, your asset allocation strategy is far more important than individual stock picking when it comes to meeting your financial goals. Asset allocation sits at the core of target-date funds and, really, at the core of all financial planning.
But what exactly is asset allocation?
Every planner has their own take, but the basic idea is simple. You diversify your portfolio across different asset classes (stocks and bonds, for instance) that, ideally, move at least somewhat independently of each other. A typical asset allocation will include:
- stocks (or stock mutual funds)
- fixed-income investments (bonds or bond funds)
- cash
- alternative assets such as gold, commodities, or real estate
You arrange the parts so that the overall portfolio has a risk and return profile that makes sense for you. And (importantly!) you rebalance the portfolio when the weights to each asset start to divert from your plan.
Example
We’ll start by assuming your ideal asset allocation is 60% in equities and 40% in fixed income.
Let’s say the stock market crashes. Your stock weighting has suddenly dropped to just 40%, and your fixed-income investments have jumped to 60% of your portfolio’s worth. You need to rebalance your portfolio to get back to 60% stocks/40% bonds. You would do that by selling off some of the fixed-income investments and buying some stock.
Now, let’s say instead that the stock market shoots higher, and you find yourself allocated 70% to stocks and 50% to fixed-income investments. If you wanted to rebalance back to 60/40, you would sell some of your stocks and buy new fixed-income investments.
The idea here is to constantly reduce risk and smooth out your returns by buying low and selling high.
Asset allocation within a target-date fund takes it a step further. Apart from regular rebalancing due to market moves, the target-date fund’s asset allocation decisions involve gradually reducing the risk (buying fewer and less risky stocks, and buying more bonds) as the fund gets closer to its target retirement date and its final asset allocation.
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Vanguard’s Retirement Funds
Vanguard has two sets of retirement funds:
- Vanguard Target Retirement Funds, a set of target-date funds along with an income fund for investors who are already in retirement
- Vanguard LifeStrategy Funds, a set of balanced funds with fixed strategies designed for investors more actively managing their own retirement portfolios
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Vanguard Target Retirement Funds
Vanguard’s Target Retirement Funds are actively managed funds that are designed to guide people into and through retirement. “But you said they were built upon index funds?” They are—the managers own a handful of Vanguard index funds, in varying amounts, to get their exposure to different styles of stocks and bonds.
Since its founding in 1976, Vanguard mutual funds and ETFs have arguably done more to lower fees and to improve the overall investing experience for clients than any other company in history. This is the company that invented the low-expense-ratio index fund, and we continue to reap the rewards of that innovation today.
Vanguard’s Target Retirement Funds generally allow for very low minimums of just $1,000 (compared to $3,000 for most of its other funds) and expense ratios of just 0.08% (which is about a fifth of the cost of a comparable fund from other providers).
So, let’s take a look at the Vanguard Target Retirement Funds to see which might be the best match for you.
| Fund | Ticker | Expense Ratio* |
|---|---|---|
| Vanguard Target Retirement Income Fund | VTINX | 0.08% |
| Vanguard Target Retirement 2020 Fund | VTWNX | 0.08% |
| Vanguard Target Retirement 2025 Fund | VTTVX | 0.08% |
| Vanguard Target Retirement 2030 Fund | VTHRX | 0.08% |
| Vanguard Target Retirement 2035 Fund | VTTHX | 0.08% |
| Vanguard Target Retirement 2040 Fund | VFORX | 0.08% |
| Vanguard Target Retirement 2045 Fund | VTIVX | 0.08% |
| Vanguard Target Retirement 2050 Fund | VFIFX | 0.08% |
| Vanguard Target Retirement 2055 Fund | VFFVX | 0.08% |
| Vanguard Target Retirement 2060 Fund | VTTSX | 0.08% |
| Vanguard Target Retirement 2065 Fund | VLXVX | 0.08% |
| Vanguard Target Retirement 2070 Fund | VSVNX | 0.08% |
| * Represents "acquired fund fees and expenses," which are the fees and expenses of the underlying funds. | ||
I won’t break down every fund on this list; that would be redundant. But I’ll review a handful that are in very different stages of their asset allocation glidepath to give you a good sampling.
Vanguard Target Retirement 2030 Fund
I’ll start with the Vanguard Target Retirement 2030 Fund (VTHRX). Given that the target date is just a few years away, this fund is intended for someone who’s very close to retirement. That said, VTHRX still has a healthy exposure to stocks. Its current allocation is about 60% equities and 40% in bonds and cash.
Again, Vanguard TDFs only own Vanguard index mutual funds to get the necessary stock-and-bond exposure. Right now, Vanguard Target Retirement 3030’s largest holdings are the Vanguard Total Stock Market Index Fund Institutional Plus Shares (VSMPX, 36% of assets) and Vanguard Total Bond Market II Index Fund Investor Shares (VTBIX, 28%).
This brings up an important point: Vanguard’s concept of what constitutes an appropriate portfolio for a person your age might or might not line up with your own preferences. You should always take a look under the hood to make sure you’re comfortable with the level of equity exposure.
Related: Retirement Plan Contribution Limits and Deadlines for 2025 + 2026
Vanguard Target Retirement 2040 Fund
Next up is the Vanguard Target Retirement 2040 Fund (VFORX), which is designed for someone with about 15 years left until retirement, or roughly around 50 right now.
The 2040 fund is more aggressively allocated; a little more than 75% of assets are invested in stocks, and the rest in bonds and cash. Like with VTHRX, the fund leans on VSMPX—which accounts for 44% of assets right now—to provide the bulk of its equity exposure. But VFORX also has a healthy 31% of assets invested in Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) for the foreign-equity portion of the portfolio.
Vanguard Target Retirement 2070 Fund
For younger investors, let’s move all the way out to the Vanguard Target Retirement 2070 Fund (VLXVX). This fund is designed for a person looking to retire in 45 years, putting them in their early 20s today. As you might expect, it’s aggressive. VLXVX invests 91% of its assets in stocks, with the Vanguard Total Stock Market Index Fund again leading the way at 54%, followed by the Vanguard Total International Stock Index Fund at 38%.
Vanguard Target Retirement Income Fund
You’ll notice that the Vanguard Target Retirement Income Fund (VTINX) is the only entry without a year attached to its name. Like the other Target Retirement Funds, VTINX is a balanced fund (read: stocks and bonds)—currently, it offers a 30/70 split of stocks and bonds. However, unlike the target-date funds, VTINX doesn’t change its allocation to meet a particular age’s needs. Instead, it’s a conservative fund designed for investors already in retirement who want to largely generate income with a little potential for capital appreciation.
Related: Beginner’s Guide to Fidelity Target-Date Funds
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Vanguard LifeStrategy Funds
Target-date funds are based on the simple but powerful premise that, all else equal, your asset allocation should glide from more aggressive to more conservative over time. As a result, target-date funds gradually lighten up on stocks and go heavier into bonds as they reach their target retirement date and final asset allocation.
But it’s not always that simple, and age is not the only variable that matters.
A proper financial plan also considers things like sources of income from pensions or Social Security, other investments you might own, any planned inheritance, the overall health and attractiveness of both stocks and bonds, and your personal attitude and feelings toward risk.
For most investors most of the time, a target-date fund is a great tool. But given all of these additional factors, it may or may not be the best tool for you.
And that’s where Vanguard’s LifeStrategy Funds come into play. If you are willing and able to do a more comprehensive financial plan, the LifeStrategy Funds give you an off-the-shelf professionally managed asset mix that is set to your target and doesn’t glide more conservatively over time.
Vanguard currently offers four LifeStrategy Funds, all of which are the beneficiaries of recent fee reductions that have brought their annual expenses down to just 0.10% annually:
| Fund | Ticker | Expense Ratio |
|---|---|---|
| Vanguard LifeStrategy Income Fund | VASIX | 0.10% |
| Vanguard LifeStrategy Conservative Growth Fund | VSCGX | 0.10% |
| Vanguard LifeStrategy Moderate Growth Fund | VSMGX | 0.10% |
| Vanguard LifeStrategy Growth Fund | VASGX | 0.10% |
| * Represents "acquired fund fees and expenses," which are the fees and expenses of the underlying funds. | ||
- The LifeStrategy Income Fund (VASIX) is allocated 20% to stocks and 80% to bonds and is designed for a conservative investor with a three- to five-year horizon. The emphasis is heavily on income as opposed to growth.
- The LifeStrategy Conservative Growth Fund (VSCGX) is slightly more aggressive and has a targeted allocation of 40% stocks and 60% bonds. The time horizon is expected to be five years or more.
- The LifeStrategy Moderate Growth Fund (VSMGX) is Vanguard’s version of the classic 60/40 portfolio with a targeted allocation of 60% stocks and 40% bonds. The time horizon is expected to be five years or more.
- The LifeStrategy Growth Fund (VASGX) is the most aggressive allocation and has a targeted allocation of 80% stocks and 20% bonds. The time horizon is expected to be five years or more.
There is one point to consider here regarding taxes.
If you hold a more aggressive LifeStrategy fund for years, then opt to trade it in for a more conservative option, you might get zapped with a large tax bill due to years of capital gains. In a target-date fund, that process will be more gradual—you’ll pay capital gains taxes due to the internal selling of the target-date fund as it gradually sells stock funds and buys bond funds—but you will generally spread the pain over several tax years, and only receive a big tax bill if you actually sell out of the target-date fund.
Related: Capital Gains Tax: What Is It, Rates, Home Sales + More
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Frequently Asked Questions (FAQs)
Do I have to buy the Vanguard Target Retirement Fund that most closely matches my age or retirement date?
Absolutely not. Age and time to retirement are important factors to consider when building an asset allocation, and Vanguard target-date funds are designed to make the process as easy and pain-free as possible. The idea is to make your portfolio appropriate for “a person your age.”
But age and time to retirement are by no means the only factors to consider. You might be more inclined to take risk than a typical person your age because you have other sources of income, expect to receive an inheritance or any number of other factors. You might be less inclined to take risk because you know you have major expenses, such as a wedding or educational expenses, on the horizon. And let’s not forget the market itself. If stocks are more attractively priced that bonds (or vice versa), you might feel it prudent to have a higher or lower allocation to stocks or bonds than your age alone would dictate.
Target-date funds are a fantastic tool, but you can absolutely tweak the way you use them.
Related: Best Vanguard Index Funds for Beginners
How often should I revisit my Vanguard Target Retirement Funds?
The main selling point of target-date funds is that you don’t have to actively manage them. They are designed to glide you towards an appropriate allocation as you age. That said, your personal situation can change over time, and that may mean that the specific Vanguard Target Retirement fund you’ve chosen is no longer the best fit. Perhaps you took retirement early, or decided to postpone it. Perhaps you recently experienced a major bear market and want to use the opportunity to buy a larger allocation to stocks on the cheap.
You should review your target-date funds after any major financial event in your life. But doing at least a casual review once a year is also a good idea. Chances are good that you won’t ultimately need to make changes. These things are designed to be buy-and-hold investments, after all. But doing an annual review forces you to take stock of your financial life and might help you to adjust your savings goals as you age.
Should I invest in Vanguard Target Retirement Funds in my IRA or in my taxable brokerage account?
Vanguard Target Retirement Funds are perfectly suitable for both individual retirement accounts (IRAs) and taxable brokerage accounts. Where you choose to hold yours may be affected by what other assets you own and how those assets are taxed. As a general rule, it makes sense to hold the least tax-efficient investments in a tax-deferred account like an IRA and the most tax-efficient holdings in a taxable account.
As an example, a stock or mutual fund you plan to buy and hold for years or even decades will generate minimal taxable gains, so holding it in a taxable account won’t hurt you (at least until you ultimately sell). But bonds tend to throw off a lot of taxable income, so holding them in an IRA will generally be preferable.
Target-date funds are generally pretty tax efficient, in that there is rarely a lot of short-term capital gains. So, you should do an inventory of your investments and rank them by tax efficiency to determine which ones you should put in your IRA first.
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