The target date fund has often been talked about as a model for harnessing the advantages of index investing and retirement saving without getting bogged down in managing the details of an allocation mix and a glidepath to derisking.
They are convenient and attractive in their simplicity: just contribute to one fund and let the professionals handle the rest of the complexity.But they’re not necessarily a panacea without cost.
True, investing in target date funds is a decent plan, and we can’t let perfect be the enemy of good enough, but it’s important to understand what you’re giving up — and what you’re paying — when you make the single-fund portfolio choice.
I am often asked about lifecycle mutual funds in general and Vanguard’s Target Retirement funds in particular. Readers somehow have gotten the vibe that I hate these funds.
A lifecycle fund is a balanced mutual fund, holding both stocks and bonds. It is also a “fund of funds,” meaning its only holdings are other mutual funds. The fund is automatically rebalanced to maintain its desired asset allocation as time goes by.
Lifecycle funds, particularly those from Vanguard and the TSP, can be great investments. They are low-cost, low-maintenance, and reasonably well-allocated among various asset classes.
We have a complex portfolio because we have four 401(k)s, two Roth IRAs, an HSA, a Defined Benefit Plan, and a taxable account. That doesn’t include 529s, UTMAs, and Roth IRAs for the kids.