When you started your 401(k) at work, you were probably handed a plan document that nobody but a Wall Streeter could understand. You were then expected to make decisions that would determine how much money you’ll have in your later years.
Huh? If it’s all hieroglyphics to you, here’s some easy guidance to make sure you’re on the right track: Do nothing.
Target-retirement funds let you set it and forget it
For those who are completely perplexed by investment choices, the smart option is to go into what’s called a target-retirement fund.
With a target-retirement fund, you select the year that’s closest to your expected date of retirement and pop your money in. Then the fund’s manager allocates it for you.
So let’s say you expect to retire in 2045. Then you buy a 2045 portfolio and sit back. That’s it. It’s that easy.
Over the next nearly 30 years, the company you choose picks a mix of stocks and bonds to get the best returns with the lowest overall risk. As as a general rule, your investments automatically become less risky the closer you get to 2045.
No mess, no fuss on your part. When you’re young, they have you heavily invested in stocks. Then as you age, you get less and less stocks and more bonds. It’s a classic investment model, but one that lets you take a ‘set it and forget it’ approach to investing.
Who offers target-retirement funds?
Several years ago, Forbes magazine reported there were nearly 300 different targeted retirement funds in the marketplace. So which company offers the best?
That would be Vanguard, according to Clark. This financial house offers no load mutual funds; no hidden 12b-1 fees; and management costs that are about one-sixth the average of other companies. T. Rowe Price and Fidelity Investments are also good places for your targeted retirement funds. You can’t go wrong with any of these three low-cost investment houses. In addition, there’s one called Blackrock that a lot of people have through work. Clark says that one is perfectly acceptable too.
The most important thing with targeted retirement funds is to make sure your annual management fees are less than .5% per year. That’s the absolute ceiling.