Is a 2055 Target Fund Needed?

The Vanguard Group has announced plans to launch a target-date fund aimed at people retiring in 2055. That’s right, 45 years from now.

“The firm has filed a registration statement with the U.S. Securities and Exchange Commission for Vanguard Target Retirement 2055 Fund, a broadly diversified fund that gradually shifts to more conservative investments over the life of the fund,” the announcement said. “Vanguard anticipates that the fund, aimed at investors 18 to 22 years old, will be available for investment in the third quarter of 2010.”

If you’re in that 18-22 age group, no need to chomp at the bit until the third quarter. You could easily wait another few months to invest, or even a year, and not suffer any ill effects. In fact, you could wait a decade or two and it probably wouldn’t matter.

That’s because an investor doesn’t start enjoying the biggest benefits of a target-date fund until middle age, when funds’ changes in asset allocation start coming more often.

That’s not to say target funds have nothing to offer young investors. These are fire-and-forget funds, meant to serve for a lifetime. As time passes, the fund automatically shifts assets from risky mix favoring stocks to a more conservative one heavier on bonds.

Because target funds take this asset allocation chore off the investor’s shoulders, they have become favorites in workplace retirement plans like 401(k)s, where money is tied up for many years.

All target fund investors, including young ones, benefit from the fund’s automatic annual rebalancing. If stocks have a big run, they are likely to exceed the investor’s target allocation. If so, the target fund sells some stocks and buys bonds to keep to the intended mix. Many small investors neglect this task when left on their own.

But target funds’ biggest benefit is the changing weight of various assets over the years. That benefit isn’t significant until the investor is over 40.