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Originally published 09/26/2022
Vanguard, the largest target-date fund (TDF) provider,* has updated its foundational TDF research paper and takes a fresh look at the methodology behind its TDF glide path. Vanguard’s Approach to Target-Date Funds applies our life-cycle theory to real-world situations and makes the case for how its glide path is constructed. Knowing that TDFs serve a broad range of investors seeking a financially secure retirement, the authors explain how our glide path is regularly evaluated to ensure that investors have a high likelihood of meeting their retirement income needs. They further stress-test the inputs leading to our glide path construction, such as the age at which the investor chooses to retire, their income needs, risk preferences, and pension benefits, to examine the sufficiency of our investor assumptions.
Vanguard’s life-cycle investing framework
Figure 1. A systematic framework for validating TDF glide paths
Applying our life-cycle theory to real-world situations
The paper seeks to validate what a growing number of target-date investors already seem to know: Vanguard TDFs are a sensible choice for most retirement income needs. In designing a glide path that supports investors’ needs and aligning it with their retirement age, risk tolerance, and other characteristics, our glide-path approach is most aligned with helping ensure clients have the savings necessary to maintain their lifestyle through retirement.
The paper further stress-tests Vanguard TDFs for varying retirement ages, spending habits, and income levels and, again, finds that for many investors across a wide range of characteristics, the Vanguard TDF is still a great option to help investors meet their retirement goals. Vanguard’s approach to building TDFs rests on a solid foundation of theory and real-world experience that ensures that the wide range of investors who count on TDFs to secure their retirement have an investment solution well positioned to meet their needs.
- For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
- All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.
- Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the Fund name refers to the approximate year (the target date) when an investor in the Fund would retire and leave the work force. The Fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. The Income Fund has a fixed investment allocation and is designed for investors who are already retired. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date.
- Vanguard is responsible only for selecting the underlying funds and periodically rebalancing the holdings of target-date investments. The asset allocations Vanguard has selected for the Target Retirement Funds are based on our investment experience and are geared to the average investor. Regularly check the asset mix of the option you choose to ensure it is appropriate for your current situation.