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Target Retirement Funds for Short-Term Goals

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?