Vanguard Target Retirement Fund - chunhualiao/public-docs GitHub Wiki
Constant Relative Risk Aversion
core algorithm
consider each years-to-retirement : counting down
- consider different choices of equity weights
- simulate wealth path from this year to the retirement year : 8000 times
- in this simplified model the CRRA utility is applied only to the ending (terminal) wealth balance that exists at the moment of retirement, not to the intermediate yearly balances.
- compute the average terminal wealth balance's utility values of all paths
- find equity weight leading to max average utility values for this year, based on 8000 simulation for each weight
Inside every inner loop the equity mix stays fixed at w for the entire remaining Y-year horizon. Because you repeat that inner loop for every w, the algorithm ends up with one “best” weight w* for that specific starting point.
for Y in [40, 39, …, 0]: # years-to-retirement
for w in [0%,10%,…,100%]: # candidate equity weights
simulate N wealth paths # 8000 simulation for example
compute expected utility EY[w] # average of 8000 utility values
choose w* that maximises EY[w]
store w* as OPT[Y]
real numbers
Below is the latest asset-mix Vanguard reports for each “through-retirement” Target-Date fund whose label spans 2030 – 2060. All figures are percent of total assets and come from each fund’s January 31 2025 Summary Prospectus, which shows the allocation “as of September 30 2024.” Totals may not sum to exactly 100 because of rounding and cash-equivalents under 1 %.
| Fund (Ticker) | U.S. Stocks | Intl. Stocks | U.S. Bonds | Intl. Bonds | Eq-total | Bond-total | |
|---|---|---|---|---|---|---|---|
| Target Retirement 2030 (VTHRX) | 36.7 % | 24.8 % | 26.6 % | 11.3 % | 61.5 % | 37.9 % | (personal1.vanguard.com) |
| Target Retirement 2035 (VTTHX) | 41.4 | 27.6 | 21.3 | 9.1 | 69.0 | 30.4 | (personal.vanguard.com) |
| Target Retirement 2040 (VFORX) | 46.3 | 30.2 | 16.0 | 6.9 | 76.5 | 22.9 | (personal.vanguard.com) |
| Target Retirement 2045 (VTIVX) | 50.3 | 33.2 | 10.9 | 4.8 | 83.5 | 15.7 | (personal1.vanguard.com) |
| Target Retirement 2050 (VFIFX) | 53.5 | 36.2 | 6.6 | 3.0 | 89.7 | 9.6 | (personal1.vanguard.com) |
| Target Retirement 2055 (VFFVX) | 53.5 | 36.1 | 6.7 | 3.0 | 89.6 | 9.7 | (personal1.vanguard.com) |
| Target Retirement 2060 (VTTSX) | 53.4 | 36.2 | 6.6 | 3.0 | 89.6 | 9.6 | (personal1.vanguard.com) |
How to read the table
- Stocks vs. Bonds: 2030 is already near the “landing zone,” so equities have dropped to ~60 %. Each five-year step further out adds ~7–8 percentage points to stocks until the glide path tops out just under 90 %.
- U.S. vs. International split: Vanguard keeps a 60 / 40 split inside equities (and a roughly 70 / 30 split inside bonds). That’s why the U.S./international columns rise in lock-step.
- Flat plateau at 2050–2060: Once you’re 30 + years from the target date, the funds all share the same 90 / 10 mix; only after 2045 will they start de-risking.
Tip: If you want a little more (or less) risk than the “standard” glide path, you can simply pick a fund five years later (or earlier) than your expected retirement year; that moves the equity weight by roughly one notch without sacrificing the automatic rebalancing convenience.
How one “2040” fund can still work for many people
| What’s really happening | Why it helps cover different risk profiles |
|---|---|
| 1. The fund is built for a median investor. Vanguard (and other sponsors) pick a single risk-aversion parameter (γ) from research on thousands of households and then run models like VCMM/VLCM to find the average-best glide path. (institutional.vanguard.com, corporate.vanguard.com) | Averages aren’t perfect, but they land near the middle of the risk-tolerance spectrum, so the fund is “good enough” for a large majority who don’t have extreme preferences. |
| 2. You’re free to pick another date. Nothing says a person must own “2040.” Want more growth? Buy 2050 or 2060. Prefer more safety? Slide back to 2035 / 2030. Vanguard explicitly suggests this as the DIY way to fine-tune risk. (ownyourfuture.vanguard.com) | Shifting the label by ±5–10 years moves the equity weight ~5–15 percentage points, which is often all that’s needed to match higher- or lower-than-average risk tolerance. |
| 3. You can “wrap” the fund with other holdings. Hold 80 % in the TDF for the automatic rebalancing and 20 % in a stable-value fund or, conversely, an all-equity ETF. | This lets you keep the set-and-forget convenience while nudging the overall mix to your personal comfort zone. |
| 4. Glide paths already de-risk over time. Even aggressive investors usually want less volatility later. The built-in equity‐to‐bond ramp absorbs some differences in tolerance that would otherwise appear throughout life. | The 2040 fund starts at ~90 % stocks and glides toward ~50 % by the early 2040s; that wide range naturally spans many investors’ preferred exposures at various ages. |
| 5. Target-date funds are defaults, not prescriptions. In 401(k)s they serve as Qualified Default Investment Alternatives—a safe harbor for employers when employees make no choice. Regulators accept that a one-size glide path is far better than inertia (e.g., 100 % company stock or cash). (ici.org) | For “defaulted” savers the priority is to avoid terrible allocations, not to tailor perfectly. |
If you truly need a custom fit
- Use a risk questionnaire or an advice engine. Vanguard’s Personal Advisor, robo-services, or a human CFP® can translate your specific risk tolerance, spending floor, and bequest goals into a bespoke portfolio.
- Build your own glide path. Advanced investors can replicate a TDF’s mechanics with total-market index funds, then adjust stock/bond splits (or add TIPS, REITs, etc.) on a schedule that suits them.
- Managed-account option inside the plan. Many 401(k)s now offer a “professionally managed” tier that individualises the mix but still handles rebalancing and tax-location automatically.
Key takeaway
A single 2040 target-date fund is a “good-default” midpoint—cheap, diversified, and automatically rebalanced. Investors whose personal risk tolerance sits meaningfully above or below that midpoint can:
- Pick a later or earlier TDF date, or
- Add/subtract risk around the TDF core, or
- Move to a custom or advised portfolio.
That layered flexibility is how one fund can serve a broad population without pretending everyone’s identical.