Overview of ChooseFI Episode 606: Deep Dive on Target-Date Retirement and Bond Funds
In this episode, Brad and Cody Garrett unpack how different “simple” investment products can be much more complex under the hood. The conversation focuses on two areas: target-date retirement funds / static allocation funds and bond investing strategies, especially target maturity bond funds. Cody’s core message is that there is no perfect portfolio—only portfolios that are appropriate, understandable, and easy for you to stick with over time.
Main Themes and Takeaways
- Don’t let the product lead the plan. Start with your financial goals, time horizon, and values before choosing any fund.
- Simple-looking funds can hide active decisions. Even “index” target-date funds often make active choices about asset mix, bond types, and glide paths.
- Behavior matters more than optimization. The best portfolio is the one you can actually follow through on for decades.
- Match money to its purpose. Cody emphasizes aligning investments with when you expect to spend the money.
Target-Date Funds: What They Are and Why They’re Popular
Target-date funds are often the default option in workplace retirement plans like 401(k)s and 403(b)s, especially with auto-enrollment.
How They Work
- Start relatively aggressive, then gradually become more conservative.
- The fund automatically shifts from stocks toward bonds as the target retirement year approaches.
- At the target year, the portfolio is usually still something like 40%–50% stocks, not 100% bonds.
Pros
- One-fund simplicity
- Automatic rebalancing
- Reduces the temptation to tinker based on short-term performance
- Helpful for investors who want a “set it and forget it” approach
Cons
- Can be too conservative or not personalized enough
- Often more expensive than buying the underlying index funds yourself
- “Index” target-date funds are still managed actively in terms of glide path and fund composition
- Can create tax consequences in taxable accounts because of underlying turnover and capital gain distributions
Why “Index” Doesn’t Always Mean Passive
Cody stresses that the term index fund can be misleading.
- An index fund can track many different indices, not just the S&P 500.
- Even a target-date “index” fund may be built from several underlying index funds, but the manager actively decides:
- which index funds to include
- how much to allocate to each
- how the allocation changes over time
Example Differences Among Major Providers
Cody highlighted that target-date funds from Fidelity, Schwab, and Vanguard can look similar by name but behave quite differently:
-
Fidelity
- Maintains a global equity allocation
- Uses long-term treasury bonds
- Gradually reduces international bond exposure over time
-
Schwab
- Starts reducing equity earlier, around 40 years before retirement
- Gradually reduces international and small-cap exposure
- Removes emerging markets at the target date
- Excludes international bonds entirely
-
Vanguard
- Considered the least opinionated
- Maintains a global equity allocation
- Keeps a fixed bond split between U.S. and international bonds
- Glide path continues even after the target retirement year
Static Allocation Funds: A Simpler Alternative?
Static allocation funds, also called fixed allocation or balanced funds, keep the same stock/bond mix over time.
Examples
- 60/40 balanced funds
- Conservative, balanced, growth, or aggressive-growth allocation funds
- Available as both mutual funds and ETFs
Why People Use Them
- One-fund simplicity
- No manual rebalancing
- More predictable than target-date glide paths
- Can be a good fit if you want a set allocation that does not change with age
ESG Target-Date Funds
Cody briefly covered ESG target-date funds, which use environmental, social, and governance screens.
Key Points
- Usually operate via exclusionary screening
- Screening criteria are subjective and determined by the fund manager
- Can unintentionally create:
- sector tilts
- value or growth tilts
- more active-management characteristics than investors expect
Broad View
Cody and Brad both noted that many investors prefer to:
- use broad index funds for investing,
- then express values through spending, giving, and local community support instead.
Bond Funds: Constant Maturity vs. Target Maturity
The second half of the episode shifts to bond strategy.
Constant Maturity Bond Funds
These are traditional bond index funds like BND:
- Hold many bonds with varying maturities
- Maintain a target average duration/maturity
- Reinvest and rebalance as bonds mature
Individual Bond Ladders
Instead of a fund, an investor can buy individual bonds that mature in different years:
- Year 1 bond, Year 2 bond, Year 3 bond, etc.
- Useful for matching future spending needs
- When each bond matures, the cash becomes available for that year’s planned spending
Target Maturity Bond Funds
These are a middle ground between bond ladders and standard bond funds.
Examples mentioned:
- iShares iBonds
- Invesco BulletShares
- Vanguard BondBuilder Target Maturity ETFs
- State Street My Income ETFs
How They Work
- The fund holds hundreds of bonds
- All bonds mature in the same year
- The fund “evaporates” at the target year and returns cash to the investor
Why They Can Help
- Helpful for investors who are afraid to sell
- Can create psychological comfort in retirement
- Match assets to known spending needs
- Useful for short- to intermediate-term liabilities
Practical Portfolio Guidance from Cody
Cody’s framework is to ask:
When do you expect to spend this money?
He uses that question to guide asset allocation.
His General Approach
- Solve for fixed income first
- Then determine the equity allocation based on remaining risk capacity
- Use the next several years of expected spending to estimate bond/cash needs
Example
If someone has:
- a $1 million portfolio
- plans to withdraw $40,000 per year for 7 years
Then a significant portion of the portfolio may need to be in bonds/cash to cover that short-term spending need.
How to Evaluate Your 401(k) Options Quickly
Cody gave a practical shortcut:
Quick Screening Method
- Sort by expense ratio
- Look for the word “index”
- Avoid stable value if you are seeking true market exposure
- If your plan lacks low-cost index options, ask your plan administrator to add them
Important Note
If your workplace plan does not offer low-cost index options, that does not necessarily mean they can’t be added. Cody encourages employees to ask for better fund choices.
Cost and Tax Considerations
Cost
Cody emphasized that even target-date index funds often cost more than building the same portfolio yourself.
In his comparison:
- Vanguard target-date index funds were about 35% more expensive
- Schwab were about 2x more expensive
- Fidelity were about 4x more expensive
He also noted that:
- Active target-date funds can be 4x–7x more expensive than index versions
- Buying the underlying funds directly can be cheaper still
Tax Efficiency
- Allocation funds with turnover can create capital gain distributions
- These funds are generally better suited for tax-advantaged accounts
- In taxable accounts, turnover can be a real drag
Final Takeaways
- There is no perfect portfolio.
- The best portfolio is the one you understand and can stick with.
- “Index” doesn’t automatically mean passive in the way most people think.
- Target-date funds are convenient, but they are not identical across providers.
- Bond funds can be used not just for return, but for stability, income, and behavioral confidence.
- The most powerful question in investing may be: When will I need this money?
Additional Resources Mentioned
- Cody’s portfolio exercise and questions:
measuretwicemoney.com/choosefi
- Related ChooseFI episode:
- Episode 556 with Rachel Camp on bonds
- Classic bond discussion:
- Episode 194 with Frank Vasquez on the role of bonds
- Cody’s book:
- Tax Planning to and Through Early Retirement by Cody Garrett and Sean Mullaney