Investing for your retirement doesn’t have to be complicated. It doesn’t have to be time-consuming either. In fact, you may only ever need just one fund – one able to take the strain and do it all for you.

Why? Because some funds can balance your investment risks with a mix of shares and bonds and then adjust this mix, automatically, as you age, so that the capital you’ve worked so hard to build is better protected just when you need it most.

These types of funds are known as ‘target-date funds’ and have been around for the best part of this century, especially in the United States. They are called this because they are designed to look after your financial interests based on your intended retirement date. All the investor has to do is pick the date, or more accurately the year, that most closely aligns with when they, broadly, want to retire.

Like all funds, they still carry some risk since the value of your investments can go down as well as up. But they are the ultimate low-maintenance investment and, potentially, the only investment you may ever need in your pension, including your self-invested personal pension (SIPP).

At Vanguard, we call our target-date funds Target Retirement Funds. Currently, we offer 11 of them. The newest is the Target Retirement 2065 Fund – for those who still have 40-plus years to go before they imagine retiring.

How do they work?

Much like Vanguard’s LifeStrategy funds, our Target Retirement Funds spread your risks across a range of global investments. They are blended funds too because they invest in a mix of shares (which offer potentially higher rewards but are historically volatile) and bonds (which tend to be more stable) in accordance with your investment goals, whatever these may be.

The difference is that Target Retirement Funds are focused solely on your retirement goals and adjust that mix of shares and bonds as you age, automatically, following a ‘glide path’ that is precision engineered to maximise the potential amount of money you can call upon when you finally cease working.

The chart below illustrates that adjustment. In this case, we have assumed a projected target retirement age of 68.

Glide paths for Vanguard’s Target Retirement Funds

Notes: Figure assumes that a particular fund was selected based on a projected target retirement age of 68. Source: Vanguard.

As you can see, the closer an investor gets to their retirement date, the less invested in shares their Target Retirement Fund becomes.

Adjusting the asset mix in this way is known as “de-risking” because the emphasis for investors as they get older gradually shifts towards capital preservation and away from capital growth, which is why having more bonds rather than shares would make sense.

After all, a young investor has more time to ride out the storm in the event of a stock market downturn than an older investor who needs (or will soon need) the money for their upkeep after many years of careful saving!

Research also shows that investors who fail to de-risk on retirement risk seeing their investment portfolios stagnate or even fall in value just when they need the money most1.

Investment horizons

The interplay between the capacity each of us have to take risks with our investments and how old we are is important to understanding how Target Retirement Funds provide a potential single-fund solution to the retirement savings needs of most people, whatever their age.

Yes, we’re all individuals. Some people can be more cautious or adventurous with their investments than others. But, in general, our capacity to take risks with our money and hold out for potentially better returns largely depends on our investment horizons, how much time we have.

Put another way, the younger we are, the more our total net worth (in a financial sense) is made up of ‘human capital’ – the money we could still potentially earn by working . The older we get, the more our potential future earnings from work diminish and the more we have to rely on our financial capital – the assets we’ve been able to accumulate over time.

Given that, why take unnecessary chances?

Lifetime partner

As a result, Vanguard’s Target Retirement Funds are 80% invested in a highly diversified global portfolio of shares for most of an investor’s younger adult life, up to the age of 43. This is then gradually reduced until it rests at 30% during retirement.

The fact that the share allocation in a Target Retirement Fund doesn’t drop to zero is important and another facet of its intelligent design. This is because your pension savings – ideally – still need some room to continue growing during your retirement to help sustain you through what, after all, might be another 20, 30, or more, years of your life.

For us, a gradual shift in asset allocation makes sense if retirement is to be viewed as a period of transition rather than as a one-time event. But it wasn’t always like that.

It used to be the case in the UK that you had to use your pension savings to buy an annuity when you retired. This would give you a guaranteed income for the rest of your life. Under such circumstances it made sense to completely de-risk your portfolios ahead of retirement. But these days there is more choice2. You can still buy an annuity, if you wish, but you can also live off your investment portfolio instead, and potentially get more retirement bang for their buck as a result.

As such, the switch between higher-risk shares and lower-risk bonds doesn’t have to be as drastic.

Of course, the nature of this transition is completely up to you. Thanks to pension freedoms and new technologies, there are new possibilities, including a more gradual phasing out of your human capital than was possible in the past, as I recently explored in another article.

Whichever path you take, our low-maintenance, low-cost and intelligently designed Target Retirement Funds has the potential to be your trusted investment partner every step of the way.

¹Achieving good retirement outcomes, XPS Pensions Group, November 2021.

² Under the pension freedoms introduced by the UK government in 2015, it is possible from the age of 55 to: withdraw all your pension savings; use them to buy annuities, guaranteed income products or flexi-access drawdown products; take out a series of lump sums; or any combination of these approaches. Investors can also leave their pension pots untouched.