USAA’s mutual fund company arm has a new offering: A so-called “target” retirement fund managed for a specific age group, who all presumably plan to reach retirement age within a few years of one another.
The new fund, the USAA Target Retirement 2060 Fund, is designed for investors who plan to begin taking income from in 2060 or shortly thereafter. That is, it’s designed for those currently around ages 18-24, give or take a few years. The fund is actively managed, and designed to be more aggressive in the early years – accepting the possibility of short-term losses in the hope of greater longer-term gains.
As the years go on, though, USAA intends to begin gradually rolling back the risk exposure, slowly converting the fund from an aggressive, stock-heavy mutual fund.
The current minimum investment is $500, if you also commit to a $50 monthly contribution. This is much lower than a $1,000 to $3,000 minimum investment, which is very common in the mutual fund world. This fund, however, is specifically designed for younger investors who may not have a lot of cash on hand to put away at once.
Currently, the fund consists of an asset allocation of about 97 percent stocks, 1 percent bonds and 2 percent cash. The total current expense ratio is 0.93 percent – which puts it on the high side for funds of this type. However, I expect that expense ratio to decline as the fund grows in size. The Target 2050 Fund, in contrast, has an expense ratio of 0.88 percent. The 2040 fund has an expense ratio of 0.84 percent, etc.
A prospectus is available here.
Getting the most out of a fund like this.
“Target” type funds are designed to be a one-stop shop for long-term mutual fund investments. They strive to maintain an appropriate mix of stocks, bonds and cash for your age group and your needs. Normally, you would not need to mix other types of mutual funds into your portfolio, unless you want some exposure to a specific asset class. For example, if you own this fund, buying an additional stock fund would be redundant, and buying a bond fund would risk watering down your portfolio too much. The fund will gradually add bonds over time, so you don’t normally need to worry about buying the core ingredients in a target fund.
However, the fund does not contain any significant exposure to microcaps, high-yield bonds, emerging markets or real estate investment trusts. So if you want these in your portfolio, you will need to add them yourself with other investments.
When it comes to Target funds, USAA isn’t the only kid on the block. One of the issues with USAA is that their target funds “mature” a decade apart from one another. If you want something designed to convert to an income oriented fund in, say, 2055, you might be better off in Vanguard. The Vanguard Target Retirement 2055 Fund, for example, also boasts a $1,000 minimum initial investment. Its expense ratio of 0.17 percent is much lower. This is significant for any investment you plan to hold for decades!