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Target Retirement Funds for Short-Term Goals

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My retirement is forty years away and I have a portion of my brokerage account invested in a 2050 Target Retirement fund at Vanguard. The Target Retirement fund makes an excellent choice for me because it handles all the asset allocation and rebalancing issues without my interference, all with a target withdrawal date in mind. That’s when I got to thinking, why not utilize target retirement funds for shorter goals?

Let’s say you have kids that are planning on going to college. The natural choice is to go with a 529 plan or some other educationally advantaged account. After you open the account, what are you going to invest in? You could figure a safe allocation, given when you expect your child to go to college, and handle the finances or you could, if your account offered it, just go with a target retirement account. Simply buy the year closest to your target date, rounding down so you’re on the conservative side, and forget about it. It’s time-wise more efficient than managing it yourself and, if you go with the right firm, the fees will be reasonable.

This plan does have drawbacks. You often don’t much international exposure, which you may or may not want given our current economic environment. Many emerging markets are growing at breakneck speeds but the dollar is weakening, there’s plenty of uncertainty. You might want international exposure and a fund like the Vanguard Target Retirement 2030 has only 17.2% invested outside the United States, of which the lion’s share, 9.2%, is in Europe. Another risk is that you don’t have exposure to the asset class that has been growing the most recently, commodities (oil and gold, anyone?). Of course, we could be in a bubble right now or we could be seeing the start to something bigger – no one can see the future.

Either way, it’s an option on the table and one that I wanted to bring up to see if you all had any thoughts on the subject. Good idea with potential? Or just buying into the marketing hype of these lifecycle funds?

{ 5 comments, please add your thoughts now! }

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5 Responses to “Target Retirement Funds for Short-Term Goals”

  1. HP says:

    Another issue is the fact that target-date funds for retirement is assuming a spend-down period of 25-35 years or so. As you get closer to the target date, the allocation may be too aggressive if you’re planning on using it for college expenses (maybe only five years or so).

    But, you have the right idea. Some 529 plans offer target-date funds specifically for college savings that assume a spend-down period that is more appropriate. You will find that the portfolio is accordingly much more conservative at the target date than a target-date retirement fund.

  2. Ceo Reom says:

    Interesting point.

    Speaking of Vanguard, have you heard about its new Total World Index Fund? Do you happen to have any more information on it? Is it like the Total Stock Market and International put together?

  3. jim says:

    Ceo: I didn’t until you mentioned it, though not much is available on Vanguard.com (mostly because it was created 6/26/08)… I’ll keep an eye out.

  4. Andys says:

    Your retirement is forty years away, so you must be between 25 and 30 yrs old! Wow, given your blog’s prominence and apparent knoweldge in the PF area – great job. I am in my early 30′s and have recently started a personal finance blog and still have a way to go to be financially free. Great to see someone of your age so far ahead of the ball!

    In regards to retirment funds, a lot of thier allocation components is generated based on computer modelling and a big factor is the time horizon (hence the target part). I would be cautious in using them for other shorter term purposes because you may not get the desired results. Also in the current market climate using past returns is dangerous. Finally, you need to think of the tax implications. 529 offers tax benefits and no penalties for using the funds for education. A retirment fund (espically if in an IRA) will have taxes and penalities if withdrawn early.

  5. Zook says:

    I like the idea of using a target date fund for other than your retirement, but the hangup comes with holding the target fund in a taxable account. Inside a 529 plan, with an 18-year horizon, I think it makes sense. Inside a IRA/401k I think it makes a ton of sense for retirement as well. I think when a solid company comes out with an ETF, then we might have a better ground to stand on.

    I currently hold a target fund and also have additional funds among my portfolio. No one says that you can only have ONE target date fund and be stuck with a certain percentage, that may be to low for you, in international. If you are starting out, it makes cents to remain invested in a target fund, but as you grow, why not add an international holding to the target fund if you want to be in a specific asset allocation?


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