Target-date funds have long been a popular way for individuals to invest for retirement. This is understandable: choose a fund with the year closest to your expected retirement date, make regular contributions, and let the professional managers handle the rest.
However, if you are planning to retire sometime during the 2030s, you might actually be able to build a portfolio that is equally diversified, notably less expensive, and much more customizable to your individual needs by using only three ETFs: the Vanguard S&P 500 ETF (VOO), the Vanguard Total International Stock ETF (VXUS), and the Vanguard Total Bond Market ETF (BND).
Why are Target-Date Funds So Popular?
Short answer: they make investing for retirement incredibly simple.
Instead of asking investors to decide how much to allocate to US stocks, international stocks, and bonds, the fund automatically adjusts those allocations over time through what is known as a glide path. It emphasizes stocks for long-term growth early in an investor’s career, then gradually shifts toward safer, income-generating assets as retirement approaches.
This is great for hands-off investors. The tradeoff, however, is that everyone follows essentially the same path regardless of individual circumstances.
A Three-ETF Portfolio Can Do the Same Job, and is More Customizable to Individual Needs
For investors who don’t mind putting in the work, an individualized three-ETF portfolio can pay off significantly in the long-run.
Vanguard S&P 500 ETF (VOO) serves as the primary growth engine of the portfolio. It provides exposure to approximately 500 of America’s largest publicly traded companies across every major sector, offering a straightforward, rock-bottom-cost way to capture the long-term growth of the US stock market.
Vanguard Total International Stock ETF (VXUS) acts as the diversification leg, holding thousands of companies across both developed and emerging markets. Because US and international stocks rarely move in perfect lockstep, VXUS reduces reliance solely on the performance of US markets.
Vanguard Total Bond Market ETF (BND) provides the stabilizing foundation, with broad exposure to thousands of investment-grade US bonds. It generates steady income and helps moderate portfolio volatility. That role grows more important as retirement approaches.
For an investor planning to retire in the mid-2030s, a reasonable starting point might look something like 60% VOO, 25% VXUS, and 15% BND. It’s still tilted toward stocks while there is roughly a decade of growth ahead, with the bond allocation gradually increasing as retirement draws closer. The right mix will ultimately depend on your risk tolerance and personal circumstances.
Together, these three funds provide broad global stock and bond exposure while also keeping costs much lower than traditional target-date funds.
Lower Costs Mean More of Your Money Stays Invested
While many target-date funds charge reasonable fees, they are still generally more expensive than owning a handful of broad-market ETFs directly. VOO and BND each carry an expense ratio of just 0.03%, and VXUS charges 0.05%, while the average target-date fund charges roughly 0.30%.
The difference may seem small in any given year, but on a $500,000 portfolio, a 0.30% fee difference works out to roughly $1,500 every year. That money will remain invested and compounding.
Additionally, by investing in ETFs rather than a single target-date fund, investors retain complete control over their asset allocation.
For example, someone planning to work into their late 60s may choose to maintain a higher equity allocation than a traditional target-date fund would offer, whereas others may prefer to increase their bond allocation earlier if wealth preservation becomes a higher priority.
A self-managed ETF portfolio allows this flexibility without being locked into a predetermined glide path.
Managing Your Own Portfolio Doesn’t Have to Be Time-Consuming
Despite a common misconception, managing your own retirement portfolio does not require constant trading in and out of investments.
Many investors rebalance only once or twice per year, restoring their allocations to pre-defined targets. This annual check-in is also the natural time to manage your own glide path, and gradually shift a few percentage points from stocks into BND as retirement approaches, replicating what a target-date fund does automatically. Outside of these occasional adjustments, very little maintenance is required.
What’s Best For You?
Target-date funds remain a great choice for individuals seeking a completely hands-off approach in investing for retirement, but other options exist.
For investors willing to spend a few more minutes each year reviewing their portfolio, a simple combination of VOO, VXUS, and BND can deliver broad diversification, lower costs, and improved flexibility.
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