This year, I’ve made a commitment to start a Roth IRA and I’ve developed a very specific plan to make it happen. I’ve also decided to use Vanguard to manage the IRA because they’ve treated me very well in the past and their returns are strong.
Now comes the hard part: how exactly do I invest within the constraints of this IRA? To do this, I asked myself a few questions.
When am I going to retire? I plan on “retiring” (which may involve working a part time job of some sort) as early as possible, which for most of my assets (save Social Security) means at age 59 1/2. I am currently roughly 28 1/2 years old, which means I am 31 years away from retirement, and my target year for retirement is 2038.
How much risk am I willing to take on? I’m fine with carrying quite a bit of risk until I get pretty close to retirement, then I want to shift back to bond holdings rather strongly. This means that I might put my retirement date even a bit later in terms of picking out a “target retirement” fund, to 2045 or so.
How much do I want to micromanage? Admittedly, not much. I plan on keeping an eye on the funds, but in terms of investigating individual stock picks, I’ll save that effort for my own individual stock investments outside of the Roth IRA, thank you.
Given that I have an approximate target retirement date (2038 to 2045) and that I want to do minimal research for the Roth IRA, I’ve elected to try out the Vanguard Target Retirement Funds, more specifically, the Vanguard Target Retirement 2045 Fund. All of the funds start out aggressive and then gradually shift the assets from stocks into bonds and eventually even into a bit of liquid cash holdings as you enter retirement age.
What’s in the Vanguard Target Retirement 2045? It’s a combination of five separate funds: four stock funds (Total Stock Market (about 72% of total holdings), European Stock (10.5%), Pacific Stock (5.0%), and Emerging Markets (2.7%)) and a single bond fund (Total Bond Market, about 9.9%). Through 2020, the portion of stocks to bonds (9:1) will remain the same, then will move about 1.5% a year from the stocks into the bonds until 2045, where the split will be about 50/50. After that, the portfolio becomes more and more conservative as you use it to live out your golden years.
It’s reasonably diversified and has returned 13.84% annually since inception (yes, past is no indication of future), which is a rate of growth that has strong appeal to me. I think I’ll buy this one and just let it sit, reinvesting any dividends and capital gains, and keep an eye on it over time.