Target retirement or Lifecycle retirement funds — how they evolve

Here are two examples of how “lifecycle” (also known as Target Retirement) mutual funds evolve with time. These are the funds that Jane Bryant Quinn recommends and discusses at length in Smart and Simple Financial Strategies for Busy People, because they are simple and automatically evolve with time in a way that financial planners recommend.   I’ve picked two Vanguard funds to show as examples, but CREF, Fidelity, T. Rowe Price, etc. all have comparable lifecycle funds.

The above plot shows the Vanguard Target Retirement 2010 fund (VTENX) (screengrab from the Vanguard website), appropriate for someone who retired in ~2010.  As you can see, when you are far from retirement the funds keeps ~90% stock and 10% bonds.  As you near retirement, the mixture switches to ~50/50%.  As you go deeper into retirement, the mixture keeps evolving more toward bonds.

Marcos asked, isn’t it risky to keep a significant fraction in stock as you reach retirement age?  The reasoning is that people do not expect to die shortly after they retire.  They expect to live for a few decades.  As a result, all lifecycle or target date retirement funds maintain a healthy fraction of stock at retirement time.  The bond fraction pays a fixed income to live on, while the stock fraction continues to (hopefully) generate growth for the next 20+ years of life after retirement.  Yes, that is riskier than 100% bonds.  The whole theme of a retirement account, unless you’re very wealthy, is that to grow your money enough to comfortably retire, you need to accept some risk.

A more helpful example for a 30-ish year old person is the Vanguard 2040 fund (VFORX), whose evolution is shown below.  As you can see, it behaves exactly the same in coordinates of years-from-retirement.