How safe is Vanguard Target Retirement 2020 from stock market downturn?

[Mrtreasuretoupee]

I have recently put a significant portion of my 401k balance (75%) into the V Target retirement 2020 thinking it would make it safe from a crash and I am getting closer to my retirement though it will be long after 2020 I'm afraid.  How safe is it? Also I've noticed it pays an annual dividend near the end of the year.  How unfortunate would you be to move your money out of the 2020 right before the Dividend because you didn't research that?

[Nothlit]

Right now, VTWNX is approximately 60% stock, 40% bond. The general rule of thumb is that the stock portion of a portfolio could drop by 50% during a major crash. So you might expect to lose 30% of the value of this investment in that scenario. Of course, that is just a rule of thumb and there is no guarantee that the market will continue to behave the same way in the future. It could be better, could be worse.

Note that target retirement funds such as this one are on a "glideslope" as they reach their target date. Over the next several years, the percentage of bonds in the 2020 fund will increase as Vanguard adjusts the allocation of this fund to be more and more conservative.

[Nick_Miller]

And it will move to a 50/50 stock/bond allocation in 2020. All the target retirement funds are set up like that. They move to 50/50 at the target date. After 2020, it would continue to slide towards bonds, but I think it maxes out at 80% bonds. They always keep at least 20% in stocks, if I remember correctly.

[RangerOne]

You can look at the history as well. In the 2008 crash the 2020 date fund, which was probably even less conservative then, dropped about 27% over the course of 2008. In 2009 it started to rebound and by the end of 2010 it had recovered.

Pure equity indexes like vanguards total stock US dropped more sharply by 37%. But also recovered by the end of 2011.

The 2020 fund definitely smoothed out the pain and hastened a rebound for that investment, which to me means it did its job.

No guarantee of that in the future of course. Not all crashes need to be so sharp and have such a swift recovery. Not all crashes guarantee bonds and equities will behave as opposites. But historically that is the right allocation if you plan to start living off that money.

[PizzaSteve]

This is a very good question to ask.  Understanding the past and also the possible risks going forward is important for all investors.

The fund is a perfectly appropriate investment for someone in your position, in my opinion.  It is a very efficient way to get exposure to the bond and stock markets.  However, if you are not comfortable with the risk of losses that BOTH stocks and bonds offer, you might consider something safer (less risk of loss but lower returns) or riskier (greater returns to fund retirement, but possibility of a larger loss).  Some folks like 100% stock for best expected returns, some like 100% t-bills and CDs for almost no risk of losses.  Its up to you.

I guess i would ask, what would you do if the value of this dropped by 40%?  I would also ask, what is the risk that your income isnt enough to retire on if returns dont allow your assets to grow, and only match inflation resulting in a scenario where you run out of money at an age when it is tough to work?

Try several scenarios with someone who can help and create plan that is right for you.  Your current asset seems appropriate at first glance.

[neo von retorch]

If you withdraw (i.e. sell shares) of a Target Retirement fund, does it sell evenly (i.e. 60/40 split)?

Look at VBTLX in 2008/2009, and you'll see that it didn't drop sharply. If you owned 40% VBTLX and 60% VTSAX, but VTSAX lost 37%, you'd live off your VBTLX until VTSAX recovered, right?