Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective
Coin Stacks

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Next month ScrapperMom and I will have both maxed out our Roth IRAs for the year. Since this is currently the only tax advantaged vehicle available to us, for us to continue to save will require a new strategy of some kind. Our prior experience with saving in taxable accounts has been in high interest savings accounts. We have never purchased stocks or mutual funds outside of a retirement account.

We have a number of medium term plans, including purchasing a new home, paying cash for a new (to us) car, buying more investment properties, etc. Some of these, like the new home and car, are expected to take place in approximately five years. This leads me to start wondering again what kinds of investments make sense for parking the money which we will begin to save in 2 months.

One idea that has crossed my mind a number of times is that of using Target Retirement Funds. Target Retirement Funds are a relatively new concept that has gained ground quickly in recent years. Generally TRFs are funds of stocks, bonds, and/or other funds that are balanced by the fund manager to be appropriate for someone who plans to retire close to the year in the name of the fund. For example, the Vanguard Target Retirement Fund 2010 has an appropriate mix of stocks and bonds for someone who is just about to retire and needs to shift from growth to a more steady income with preservation of capital. The nice thing about these funds is that they automatically adjust over time so that someone who owns shares of one of these funds does not have to rebalance her portfolio periodically. The funds also continue to adjust as the date of retirement passes by, so they continually become more and more conservative.

The Vanguard 2010 Target Retirement Fund (VTENX) is currently composed as follows:

Top 10 Holdings

Security Net Assets
Vanguard Total Stock Mkt Idx 44.08%
Vanguard Total Bond Market Index 40.28%
Vanguard European Stock Index 6.18%
Vanguard Inflation-Protected Secs 4.43%
Vanguard Pacific Stock Index 2.69%
Vanguard Emerging Mkts Stock Idx 2.27%
Vanguard Total Stock Market ETF 0.05%

Typical TRFs have some interesting characteristics. They are passively managed, meaning that the funds or the contents seek to match some index, and are only adjusted periodically by a manager to track the index. The balance in the fund is only adjusted periodically to be appropriate for the date of retirement. Because of this, the management fees or expense ratios tend to be low. They also tend to be tax efficient since there isn’t a lot of trading so the realized gains are low. They are now available at most major brokerages. As Kevin at No Debt Plan shows, one huge advantage of a TRF is that the barrier to entry into the fund is substantially lower than inventing in each of the funds in the fund individually.

Why am I considering a “retirement” fund for medium term savings? Well, that’s what I’m trying to figure out also. If a 2010 TRF is a smart move for someone at or near retirement who needs to try to continue to earn enough to keep pace with inflation but can’t afford to lose any money, then why wouldn’t this also be ideal as a medium term savings vehicle?

Let’s look at the pros and cons:


  • Low cost barrier to entry; if I wanted to create a well rounded portfolio for this savings goal it would take nearly over $15,000 just to get started.
  • More upside potential than a cash account like a CD or Money Market account
  • Easy to manage
  • Tax efficient


  • No guarantee on return
  • No guarantee on capital; more downside potential than a cash account
  • Periodic fees in the form of expense ratios
  • Lack of “peer review” in concept

I’m the type of person who is generally willing to take on a bit more risk than many. While this investment is not without risk, the risks are generally low, as the fund is well diversified across several different investment classes, many different investments within those classes, and through global investment exposure. I’d like to see some real estate investment trusts in the mix, but I think this is probably as good as it’s going to get for now.

So what do you think? Am I crazy or brilliant? Is this a good strategy for a medium term (5-10 year) savings plan, or is it too risky for such a short term? Should I go for the 2010 or 2015 plan? What do you think about using the 2020 or 2025 TRF for longer term goals?