Set It and Forget It: Target-Date Funds for Retirement

We’ve established that the Roth IRA is the best way to save for retirement. Now that we have a “house” (the Roth), what “furniture” (investment funds) should we put inside?

One type of fund that has grown tremendously in the last 5 to 10 years is the target retirement fund. These funds are designed to give you the appropriate mix of stocks, bonds, ETFs (exchange traded funds) and mutual funds based on the number of years until your retirement.

Most investment companies have target funds in five-year increments. Based on your age and the number of years you plan to remain in the workforce, select the fund closest to the year you plan to retire. For example, if you plan to retire in 30 years (2042), choose the 2040 fund.

These accounts are extremely easy to set up — just put all of your money into the fund and the fund manager will take care of the individual investment mix. They offer adequate diversification across a variety of industries and require very little monitoring. My favorite company to use is Vanguard, which has very low fees relative to others in the industry (0.19% vs 1.5% or higher).

These funds are extremely low-maintenance. At the outset, when you’re young and have perhaps 35 to 40 years until you stop working, they are set up to invest heavily in stock-type choices. The fund I use, the Vanguard Target Retirement 2050 Fund, invests in about 90% stocks and 10% bonds at the time of this writing. The mix of funds automatically turns more conservative by increasing the ratio of bonds to stocks as you approach retirement age.

A target retirement fund inside a Roth IRA is an efficient, low-cost way to save for retirement. The strategy is very simple: set it and forget it. You can open a Roth account for as little as $1,000. Set one up today and start putting money away for your future.

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