Some people will tell you that target retirement funds are equivalent to retirement investing on auto-pilot. Simply put your money into one fund and you’re guaranteed a great retirement nest egg. Personally, I don’t think any investment is that simple, but target retirement funds can make your retirement planning much easier for you.
In our previous articles about index funds and smart investing, we talked about the importance of choosing funds (and investments in general) that are low-cost and are adequately diversified across your portfolio. Target retirement funds diversify for you, and automatically adjust over time as you get closer to your targeted retirement date. For instance, if you choose a fund like Vanguard’s Target Retirement 2045 (VTIVX) you’ll see that about 90% of the fund is invested in stocks since there’s still some 30 plus years until retirement. Over time, that allocation will change to put your money into less volatile investments as you get closer to retirement. That’s right, you don’t have to do anything, the fund adjusts the allocations over time for you!
Sounds like a can’t miss right? Well, any stock investments carry risk even in index funds. But the main thing that you need to worry about is the other part of the smart investing equation…cost. Not all targeted retirement funds are created equal, so you want to ensure that you’re getting a fund that properly allocates your investments according to your timeline and also has a low expense ratio. So which one’s are best? Traditionally Vanguard funds are the low-cost kings that also offer great performance. T. Rowe Price also has an exceptional group of target retirement funds that are high performing with low expense ratios that compare well to the Vanguard funds. My Money Blog has a nice comparison of the two fund heavyweights, that shows a lot of similarities between the two.
Target retirement funds are great for the average investor that is too busy (or has no desire) to do the detailed research and analysis needed to invest in stocks by themselves. Not everyone wants to do that, or feels that they have the knowledge to do it successfully, but we all need to prepare for retirement somehow. These auto-adjusting funds make for a great way to do that, and can really simplify the way you look at investing.
