Finance

Vanguard Target Retirement 2055: All You Need To Know

Vanguard Target Retirement 2055

The famous Vanguard Target Retirement 2055 Fund (NASDAQMUTFUND:VFFVX) is a retirement mutual fund designed specifically for investors who are planning to retire between the years 2053 and 2057. This mutual fund is a lifecycle, target date mutual fund designed specifically for people willing to retire during the aforementioned timespan. The Vanguard Target Retirement 2055 mutual fund is an extremely popular 401(k) and IRA fund among the millennial crowd. For the time being, this low expense ratio fund is primarily focused on stocks. 

What is a target-date fund?

Also referred to as lifecycle or age-based fund, a target-date fund is designed to provide a simple choice of retirement investing to investors. 

While stock-based funds usually carry high long-term return potential, they also come with high volatility. Bond-based funds on the other hand are a much more stable source of income. However, bond-based funds lack the long term potential of stock-based funds.  So a general rule of thumb is for younger investors to invest in stock-based funds as they start and shift to bond-based funds as they near their retirement age.

Target-date funds help the investors out by automating the process. Target-date funds shift their holdings into income-oriented retirement portfolio of bonds from growth-oriented stock funds over the course of time. 

The Vanguard Target Retirement 2055 Fund

Assuming the typical retirement age to be 65, the Vanguard Target Retirement 2055 Fund is mainly designed for investors who are between the ages of 27 and 31 right now. However, this can vary for people if they are planning an earlier/later date for retirement.

Much similar to other target-date funds in the Vanguard stable, the investment strategy of the Target Retirement 2055 is quite simple. This fund allocates its assets to four index funds (belonging to Vanguard itself) instead of investing in actual stocks and bonds. This passive investment method results in a very low cost of investment which is just 0.16% in passed-through expense ratios. 

These were the index funds and their respective allocations as of May 31, 2016:

Vanguard Total Stock Market Index Fund (54.1%)

Vanguard Total International Stock Index Fund (35.9%)

Vanguard Total Bond Market II Index Fund (7%)

Vanguard Total International Bond Index Fund (3%)

As you can see from the breakup listed above, 90% of the investors’ assets in this fund are allocated to stocks. The remaining 10% are allocated to bonds. Stocks tend to outperform all other asset classes over the course of time. So it makes sense for the Vanguard Target Retirement 2055 fund to take advantage of that. 

What to expect in the future with the Vanguard Target Retirement 2055?

The Vanguard Target Retirement 2055’s strategy is focused on shifting its asset allocation in stocks based funds to bond-based funds until seven years past the target date, or 2062. When that point of time is reached, the holdings of the Vanguard Target Retirement 2055 will look similar to that of the Vanguard Retirement Income Fund. That fund only has about 30% of its assets allocated to stock based funds while the rest are allocated to bond based funds. 

However, investors must remember that there are over 40 years to go between now and 2062. That makes it very important that investors know what to expect during that long timeframe. It’s impossible to predict such things with a 100% accuracy but a look at the other target-date funds of Vanguard can give a good idea. 

Is the Vanguard Target Retirement 2055 right for you?

Similar to all target-date funds, the Vanguard Target Retirement 2055 fund is meant to serve as an all in one fund with a completely diversified investment portfolio. The Vanguard Target Retirement 2055 fund can perform well on its own. It can also be used for supplementing the other high quality mutual funds and stocks owned by you.

However, every potential investor must remember that a one-size-fits-all investment fund doesn’t exist in the real world. The Vanguard Target Retirement 2055 fund is designed for an average investor who wants to retire in the year 2055. However, there is no guarantee that you will fall within that group. Your retirement goals and planned retirement date can be different from others. 

Depending on your risk appetite, you can choose your fund accordingly. For example, if you have a lower risk appetite and want to utilize a more conservative approach towards investment, you can choose a fund which shifts from stock-based funds to bond-based funds sooner than the Vanguard Target Retirement 2055. You can choose a fund such as the Vanguard 2050 or even the Vanguard 2045 target-date fund. Conversely, if you have a higher risk appetite and want to be bolder with your investment strategies, you can invest your money in a fund with 2060 as the target date.  
The main reason behind discussing all of that is, that while the Vanguard Target Retirement 2055 fund is a great choice in general, you still need to analyse it for your specific needs and see if it fulfils them. Few things could be financially worse than getting your money stuck in something you are going to regret later. You will never be able to retire in peace if a major chunk of your money is stuck in a fund whose strategy isn’t really working for you. The Vanguard Target Retirement 2055 is a great target date retirement fund, but don’t rush into investing your hard earned money into something you haven’t researched enough to be sure about. For those millennials who are intending to retire at 50, this is definitely a good option though.

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