Vanguard vs T. Rowe Price Target Date Funds

Planning for retirement, paying for college, and growing your personal wealth is easy thanks to target date funds. Both Vanguard and T. Rowe Price target date funds invest your money with regular asset rebalancing throughout the life of the fund. In the early years, the funds favor higher-risk investments.

As you get closer to the end of the fund’s lifespan, the investment portfolio gradually shifts to more risk-averse investments to best align with your goals.

Target date funds allow investors to plan for future financial needs at a fixed date by properly balancing risk in relation to where they’re at in their timeline.

FundMin. DepositAverage 1-Year ReturnAverage 5-Year ReturnAverage 10-Year ReturnDividend Yield
T. Rowe Price 2035 Fund$2,50023.70%8.46%10.13%1.79%
Vanguard 2035 Fund$1,00022.44%7.81%9.54%2.32%

As of Dec. 31, 2019

What is a target date fund?

Target date funds are unique investing tools typically utilized for retirement planning, college tuition accounts or any other future financial need tied to a specific date. Funds will have a target year that is the centerpiece of all investment decisions with the account. The idea is for fund managers to make decisions that balance growing the fund as much as possible while protecting the money as the target date nears.

In the early years of the account, fund managers invest in riskier investments with greater growth potential. As the target date when you’ll need the money approaches, fund managers gradually shift investments into low-risk options with lower growth potential to, in essence, “lock-in and protect” the gains made in the earlier years. This is much like the basic strategy around retirement accounts where you can take bigger risks early in life while you’re still working but have to opt for more stable investments as you get closer to retirement.

Each investment bank will have several different funds to choose from based on the target year you’re looking for. Choose the fund that matches the year you’ll need your funds, and the rest operates on autopilot.

Vanguard vs. T. Rowe price target date funds

T. Rowe target date funds and Vanguard target date funds are two of the most popular and trusted options within the industry. While similar, each of these company’s funds does have some important distinctions to be aware of when choosing where to invest.

Mutual fund expense ratio comparison

While it would be great if mutual funds were managed for free, that is not the case. Each fund has an associated expense ratio that covers the cost of fund management. While not ideal, it makes sense that it costs money to employ fund managers that drive the best returns possible.

The expense ratio on T. Rowe Price’s target date fund for 2035 is 0.68%. Vanguard’s expense ratio for its comparable 2035 target date fund is only 0.14%. Obviously, lower is better here. One of the big selling points for Vanguard is that its average expense ratio on its mutual fund products is 81% less than the industry average.

Average return on investment

Not only should you compare the expenses you’ll pay for the management of a target date fund, but you should also look at the average return in the past one, five and 10 years. Do keep in mind these returns are not guaranteed and are subject to the market conditions and decisions by your fund manager. Over the past decade, the 2035 T. Rowe Price target date fund outperformed the Vanguard equivalent.

These are just the returns on the 2035 fund variants. If your target date is later or earlier, you’ll be looking at different funds that may have differing returns in the past. More importantly, you’ll want to see if the same fund managers that are currently managing the funds have been around for these numbers.

For example, the main fund manager for the 2035 T. Rowe Price target date fund has been managing the fund since 2004. Attributing the successes of the fund to him could be a good indicator of future performance. For the 2035 Vanguard fund, both current fund managers have only been managing the fund since 2013. In this instance, you’d be wiser to analyze the one and five-year return numbers when these two managers were at the helm.

Lastly, you’ll want to consider the dividend yields paid on these accounts. On these 2035 funds, Vanguard outperformed T. Rowe Price over the past 12 months. All of this information is readily available on the fund’s websites and should be analyzed for the particular target date you’re looking to invest for.

Account minimums to get started

When looking to begin an investment account for future financial needs, you’ll want to look at the account minimums needed to start your account. You won’t be able to get started with a fund until you have that amount, which means you might need to wait to invest or choose to invest in a different target date account. For Vanguard, the account minimum on this family of funds is only $1,000. T. Rowe Price will require a larger initial investment to get started as the account minimum is higher at $2,500.

The final word

For those looking to invest for a financial need at a future date, a Vanguard target date fund or a T. Rowe Price target date fund are both great choices. Depending on the year you’re looking to save for and the amount of money you have to get started, one or the other might be the right choice. Taking a few minutes to do some research on historical returns, fund managers, account minimums, and any additional parameters can set you up for future financial success.

Jason Wesley

Personal Finance Contributor

Jason Wesley is a seasoned copywriter with a passion for writing about banking, tech, personal growth, and personal finance. As a business owner, relationship strategist, and officer in the U.S. military, Jason enjoys sharing his unique knowledge base and skill set with the rest of the world.

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