Chapter 16
TRFs: The simplest path to wealth
of all
OK, you’ve read this far and while the Wealth Accumulation Portfolio requires only one fund and no effort, you need the Wealth Preservation Portfolio and that requires two. So you’re thinking, “Aww man. Two funds?
And I gotta rebalance them every year? That’s too much to keep track of!”
Maybe you are even thinking, “I get what he’s saying in the last chapter, but I’d still like some international exposure in my portfolio.”
I hear your pain. You need the simplest of all possible paths. You need to be able to buy just one fund and own it till your dying day. Any asset allocation crap should be handled for you. You have bridges to build, nations to run, great art to create, diseases to cure, businesses to build, beaches to sit on. I’m here for you bunkie.
More importantly, Vanguard is as well with a series of 12 TRFs (Target Retirement Funds). For that matter, so are other mutual fund companies, but as you know Vanguard is the primo choice around these parts so we’ll be talking about their TRFs. If your 401(k) or similar plan offers only one of the others, what is said here (excepting expense ratio costs) still applies.
If you visit www.vanguard.com, you’ll see that these 12 funds range from Target Retirement 2010 to Target Retirement 2060, plus one for those already in retirement at age 72 and above. The idea is that you simply pick the year you plan to retire and find the appropriate fund. Other than adding as much as you can to it over the years and arranging for withdrawal payments when the time comes, there is nothing else you need ever do. It’s
a beautiful and elegant solution.
Let’s peek under the hood.
Each of these Target Retirement Funds is what is known as a “fund of funds.” This just means that the fund holds several other funds, each with different investment objectives. In the case of Vanguard, the funds held are all low-cost index funds. As you know by now, that’s a very good thing.
The TRFs ranging from 2020 to 2060 each hold only four funds:
Total Stock Market Index Fund Total Bond Market Index Fund Total International Stock Market Index Fund Total International Bond Market Index Fund
To those four funds the TR 2010, 2015 and 2020 funds add:
Short-Term Inflation-Protected Securities Index Fund
As the years roll by and the retirement date chosen approaches, the funds will automatically adjust the balance held, becoming steadily more conservative and less volatile over time. You needn’t do a thing.
The expense ratios range from .14% to .16%, depending on the fund.
Not quite as low as a basic index fund like VTSAX (.05%), but very good considering the extra simplicity these offer.
What are the shortcomings?
Some people say the funds get too conservative too soon. Others complain that they are too aggressive for too long. For my money, I think Vanguard gets it pretty close to spot on. Maybe a bit conservative for me personally, but then I’m on the aggressive side. This is easy to adjust for. If you want a more conservative (greater percentage of bonds) approach, choose a date before your actual retirement. The earlier the date the more conservative the asset allocation. If you want more aggressive (greater percentage of stocks), just pick a later date.
Other fund companies use differing allocations for different retirement dates. If those are what’s offered in your 401(k) or 403(b) plan, you’ll need to take a look and decide accordingly. But the same principles apply.
Given these benefits and relatively low costs, I am comfortable recommending TRFs. They are an excellent choice for many, maybe even most people. They will certainly outperform the vast majority of active management investment strategies over time.
But I do have a slight preference for the approaches described in the earlier chapters. Here’s why:
The expense ratios are even lower than those of the TRFs.
The TRFs all hold the Total International Stock Market Index Fund. While this is an excellent fund, as we discussed in Chapter 15 I don’t feel the need for additional international coverage beyond that found in the Total Stock Market Index Fund, VTSAX.
With separate funds, I can keep my bonds in my tax-advantaged bucket, protecting the dividends and interest from taxes. If you decide to own TRFs, they too are best held in a tax-advantaged bucket.
Where are you likely
to find Target Retirement Funds?
Target Retirement Funds have become very popular as options in the 401(k) and 403(b) retirement plans offered by employers. The idea is most people really have very little interest in investing. Overall, this is sound thinking and TRFs provide an effective, simple and well-balanced “one decision” solution. Plus, because such retirement plans are tax-sheltered, the interest from the bonds and the dividends from the stocks go untaxed. Of course, other than those held in Roth 401(k) or Roth IRA accounts, when money is withdrawn in retirement taxes will be due.
What should you do?
If your company’s retirement plan offers TRFs from Vanguard or low-cost equivalents from another fund company, they are well worth your consideration.
If you want a portfolio that’s as simple as possible and still effective, TRFs are for you. They have The Simple Path to Wealth stamp of approval.