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Is a Target Retirement Fund right for me? |
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The following questions and answers will help you understand how you can benefit from Vanguard Target Retirement Funds.
A. Yes. Vanguard Target Retirement Funds allow you to implement sophisticated strategies, while leaving the time-consuming details of portfolio management to Vanguard. Target Retirement Funds take advantage of Vanguard's years of experience providing investment advice to high-net-worth and institutional investors. Q. Could a Target Retirement Fund be appropriate for a new investor? A. Target Retirement Funds are an excellent choice for a new investor. You have only one decision to make: when you plan to retire. Vanguard does the rest, assembling and managing the mix of stock, bond, and money market funds appropriate for your stage of retirement planning. You don't need a lot of money to get started, either. With an initial investment of just $3,000, Vanguard Target Retirement Funds can provide broad diversification across all the major asset classes. Achieving comparable diversification outside the Target Retirement Funds could require a significantly higher initial investment. Q. How are Target Retirement Funds constructed? A. Each Target Retirement Fund holds investments in some or all of the following underlying Vanguard funds: Vanguard Total Stock Market Index Fund Vanguard European Stock Index Fund Vanguard Pacific Stock Index Fund Vanguard Emerging Markets Stock Index Fund Vanguard Total Bond Market II Index Fund Vanguard Inflation-Protected Securities Fund Vanguard Prime Money Market Fund Each of the Target Retirement Funds holds a different allocation of these seven funds according to its targeted retirement date. For example, Target Retirement 2050 Fund has an initial allocation of 90% stocks and 10% bonds, divided among the following funds:
Over time, the fund will gradually shift to a more conservative asset mix by decreasing its stock allocation and increasing its bond allocation. Five years after 2050, the fund's asset allocation will resemble that of the Target Retirement Income Fund, with 65% of its assets in bonds, 30% in stocks, and 5% in short-term reserves divided among the following funds:
Note: The final allocation of the Target Retirement 2050 Fund automatically adjusts to become the same as that of the Target Retirement Income Fund. Q. Isn't it unwise to put all of my assets into just one fund? A. Not necessarily. Each Vanguard Target Retirement Fund is a multifund portfolio that invests in up to seven other Vanguard stock, bond, and money market mutual funds. And each one can provide greater diversification for a smaller minimum investment—and lower costs—than if you tried to put together a portfolio of so many different funds on your own. You have the convenience of consolidating your retirement assets into a single portfolio and investing them across the broad stock and bond markets (including international stocks and inflation-protected bonds) at the same time. In fact, combining a Target Retirement Fund with other investments—including other Target Retirement Funds—can potentially complicate what is designed to be a simpler strategy for building a complete portfolio. If you do combine a Target Retirement Fund with other investments, you may wind up with asset overlap or other diversification problems because the same security or the same industry sector could be part of multiple funds. In addition, your asset allocation could turn out to be different from what you expected. Q. What are the risks of Target Retirement Funds? A. Target Retirement Funds have different degrees of exposure to the stock and bond markets because each fund is subject to varying combinations of stock and bond market risks. Therefore, risks will differ among the funds. For example, Vanguard Target Retirement 2050 Fund has 90% of its assets in U.S. and international stocks and 10% in U.S. bonds. The high stock allocation means that the fund will initially have a lot of exposure to stock market risks such as "market risk"—the risk of a generalized decline in stock prices. The fund also has some exposure to risks unique to international investing such as "currency risk"—the risk that unfavorable movements in international exchange rates will reduce returns for U.S.-based investors. Of course, you should be aware that stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries. At the other end of the spectrum, Vanguard Target Retirement Income Fund has 65% of its assets in bonds, 30% in stocks, and 5% in short-term reserves. The high allocation to bonds means that the fund would be highly influenced by bond market risks such as "interest rate risk"—the risk that a rise in nominal or real interest rates will reduce the prices of bonds held by the fund. The fund also has a lesser degree of exposure to "credit risk"—the risk that a bond issuer will be unable to make interest or principal payments in timely manner. Be aware that diversification does not ensure a profit or protect against a loss in a declining market. Q. How might I use these funds outside of my own retirement program? A. A Target Retirement Fund can meet goals other than your retirement. For example, some investors choose such funds as gifts for less financially experienced relatives or to set up retirement accounts for family members through tax-free gifts as part of estate planning. It's the simplest way to establish or add to a retirement account for a son or daughter. Q. Can Target Retirement Funds be used in both tax-sheltered and taxable accounts? A. Target Retirement Funds are especially appropriate for tax-sheltered accounts such as IRAs and employer-sponsored retirement plans. However, if you've already contributed the maximum amount to these accounts, Target Retirement Funds provide many of the same benefits in a taxable account—low costs, broad diversification, and professional management—but their suitability in a taxable account depends on your tax situation. Q. How do Vanguard Target Retirement Funds differ from Vanguard LifeStrategy® Funds? A. Both Target Retirement Funds and LifeStrategy Funds are suitable for retirement. Like Target Retirement Funds, LifeStrategy Funds invest in underlying Vanguard funds—largely index funds. The primary difference between the two sets of funds is that LifeStrategy Funds maintain generally consistent asset allocations over time, while each Target Retirement Fund automatically shifts from a more aggressive to a more conservative asset allocation as its target retirement date approaches. With LifeStrategy Funds you also assume more responsibility. You select one of the four LifeStrategy Funds based on your risk tolerance, investment goals, and investing time horizon. (Determine your risk tolerance by completing our Investor Questionnaire.) After choosing a LifeStrategy Fund, you need to make sure that the fund's allocation remains suitable for your needs. You may want to switch periodically to a LifeStrategy Fund with a different allocation as your circumstances and risk tolerance change. However, be aware that there may be tax implications when you exchange shares in taxable accounts. Note: An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund. |
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