Why a Pre-Mixed Portfolio/Target Date Portfolio?

Posted on July 10, 2008. Filed under: -- Building Wealth, -- Money Help (in simple terms), -- YOUR Retirement | Tags: , , , , |


By Molly Greaves

These portfolios are becoming more and more popular. The wonderful thing about them, is that you only have to decide on ONE thing: When are you going to retire? They’re especially great for people that dont understand how to choose their own funds, but understand the importance of investing and still want to be able to participate.

They’re designed to help you achieve the right mix of investments for your 410(k) (for example) based on when you want to retire.   They grow more conservative as your retirement date nears. So, as the years go on, these people called fund managers, will adjust your allocation (your mixture of stocks, bonds, and cash reserves) as you get closer to your retirement date, so you have less risk.

Which Fund is right for YOU?!

Find your current age using the chart below (that I got from Vanguard’s website). You’ll be able to then see the approximate amount of years until you retire (of course this varies with each person, but this is following standard US typical guidelines) and also the recommended fund for YOU based on the age you’ve selected. 

Fund Name Your Current Age Years to Retirement
Vanguard® Target Retirement 2050 Fund 18–25 About 44
Vanguard® Target Retirement 2045 Fund 26–30 About 37
Vanguard® Target Retirement 2040 Fund 31–35 About 32
Vanguard® Target Retirement 2035 Fund 36–40 About 27
Vanguard® Target Retirement 2030 Fund 41–45 About 22
Vanguard® Target Retirement 2025 Fund 46–50 About 17
Vanguard® Target Retirement 2020 Fund 51–55 About 12
Vanguard® Target Retirement 2015 Fund 56–60 About 7
Vanguard® Target Retirement 2010 Fund 61–65 About 2
Vanguard® Target Retirement 2005 Fund 66–71 In retirement
Vanguard® Target Retirement Income Fund 72+ In retirement

Although the above suggests the Target Fund 2045 for me, since I am 26,  I also used other thought when deciding which account was right for me, in case you’re interested at all.

I am 26 years old, and although I’d love to say I could retire  tomorrow, I most likely wont be able to do that, so I invest money when I can and enjoy, moving and playing with what I’ve accumulated. Within my portfolio mixture, I do have some money in a Target 2045 Fund with Vanguard.

I selected the 2045 Fund for a few reasons. I know that’s far away, but that is the fund associated with my age. Another reason,  I like it for me is because it is also more aggressive than let’s say a 2015 Fund. That’s because people that retire in 2015 will be retiring 30 years earlier than those at 2045. Therefore, their portfolio mix should be less aggressive since they don’t have as much time to ride out the ups and downs. That means that people retiring in 2015 would have much more bonds than stocks in their portfolio mix, whereas the opposite is true for 2045 retirees.

The above chart is just a recommendation. Heck you could be 26 and already retired. That’s why I’ve been thinking about becoming more aggressive and moving the money from my Target 2045 Fund to the 2050 fund, which would expose me to more stocks and less bonds.

Let’s take a peak at how the average asset allocation portfolio looks for the 2015 and 2045 Funds. Again,I’m using examples from Vanguard’s actual accounts.

  Target Retirement 2045 Target Retirement 2015
Effective Date 05/31/2008 05/31/2008
Stocks 89.73% 63.30%
Bonds 10.01% 36.69%
Short-Term Investments 0.26% 0.01%
Other 0.00% 0.00% —        

 

Notice the difference between the % of stocks vs bonds in each account. See how the 2015 account becomes less aggressive as you get closer to retirement?  There become more bonds and less stocks with time to help safeguard your money as you get closer to retirement.

**If you’d like to take this information to the next level, the breakdown of the specific funds this account invests in are listed below:    

                                                             2015 FUND’S INVESTMENTS:   

                                                                    As of: 5/31/2008                                   

          

Ranking By Percentage Fund Percentage
1 Vanguard Total Stock Market Index Fund 50.9%
2 Vanguard Total Bond Market Index Fund 36.7%
3 Vanguard European Stock Index Fund 6.8%
4 Vanguard Pacific Stock Index Fund 3.0%
5 Vanguard Emerging Markets Stock Index Fund 2.6%
Total 100.0%            

 

                                                                           2045 FUND’S INVESTMENTS:
                                                                                    As of: 5/31/2008   
Ranking By Percentage Fund Percentage
1 Vanguard Total Stock Market Index Fund 72.1%
2 Vanguard Total Bond Market Index Fund 10.0%
3 Vanguard European Stock Index Fund 9.7%
4 Vanguard Pacific Stock Index Fund 4.4%
5 Vanguard Emerging Markets Stock Index Fund 3.8%
Total 100.0%            

 

Now, let’s compare their returns. Here are some historicals on them:
Target Retirement 2045 Target Retirement 2015  
Year To Date –2.25%    
1 Year –3.51%    
3 Year 9.56%    
5 Year    
10 Year    
Since Inception 10.56%    
Inception Date 10/27/2003 10/27/2003
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