Clark’s investment guide for beginning investors

Investment guide for beginners: A look at Vanguard’s target retirement funds and others

If you’re overwhelmed by the idea of investing for retirement, there is no easier choice than a target retirement fund.

Here’s how they work: You select the fund with the year closest to when you want to retire and simply put all your money into it. Then the fund manager adjusts the stocks to bonds ratio of your fund as you age. It’s that easy!

As a general rule, the fund manager will have you very heavily weighted in stocks during your younger years and have relatively few bonds in the mix. That’s because he or she wants your money to grow at its maximum level the younger you are.

Stocks offer both higher reward than bonds, but also higher risk. That’s the kind of risk you can afford to take in your early years.

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Over the years, the manager will tweak that mix so you have more bonds and fewer stocks. Now, the objective is the opposite: As you approach retirement, you want to focus more on capital preservation, and that’s achieved by relying more heavily on the relative safety of the bond market.

But here’s the thing: You’ll never be completely out of stocks with a target date retirement fund. That’s because you never want to outlive your money. So you always need at least some exposure to higher rewards (and risks) of the equity market.

Otherwise, if you went 100% into bonds as you approached retirement, your money wouldn’t grow and would eventually get eaten up by inflation. That’s a sure recipe for a lean retirement and possibly being broke during your golden years.

[Editor’s note: As a hedge against the possibility of being broke in retirement, money expert Clark Howard has recommended a little-known insurance policy called longevity insurance that you can purchase at the time of your retirement.]

But back to target retirement funds, which are offered by low-cost investment houses like Vanguard, Fidelity, T. Rowe Price and Charles Schwab, among others.

With target retirement funds, you get access to a broad array of capitalism. The money goes into a variety of things like big company stocks, little company stocks, international stocks and a bunch of different types of bonds. By the way, bonds are where you are the bank lending money to a corporation or a state or local government.

Some target retirement funds also include commodities and real estate as part of the mix, too. But again, the key is that as you age, the investment choices get steadily more conservative. You don’t have to do a thing other than invest your money. It’s the ultimate in “set it and forget it” investing and could be the best and easiest investment choice you ever make.

Vanguard is among my favorite target retirement fund companies, but there are others I like too…

Target retirement funds

With these funds, you pick the year you expect to retire — let’s say 2045. Then you buy that portfolio and over the next 30 years the company you choose picks a mix of stocks and bonds to get you the best return with the lowest overall risk. As you get closer to 2045, your investments become less risky.

Fidelity Freedom Funds

Fidelity.com
Invests in a combination of stocks, bonds and cash equivalents
Years available: 2020, 2025, 2030, 2035, 2040, 2045, 2050 and 2055
Expense: between 0.1% and 0.75%
Minimum investment: $2,500 minimum to open an IRA; $2,500 minimum to open an investment account

T. Rowe Price

TRowePrice.com
Invests in a combination of stocks, bonds and cash equivalents
Years available: 2020, 2025, 2030, 2035, 2040, 2045, 2050, 2055 and 2060
Expense: between 0.61% and 0.75%
Minimum investment: $1,000 minimum to open an IRA; $2,500 minimum to open an investment account

Vanguard Target Retirement Funds

Vanguard.com
Invests in a combination of stocks, bonds and cash equivalents
Years available: 2020, 2025, 2030, 2035, 2040, 2045, 2050, 2055, 2060 and 2065
Expense: between 0.13% and 0.15%
Minimum investment: $1,000 minimum to open an IRA or general account

Schwab Target Retirement Funds

Schwab.com
Invests in a combination of stocks, bonds and cash equivalents
Years available: 2020, 2025, 2030, 2035, 2040, 2045, 2050, 2055 and 2060
Expense: 0.08%
Minimum investment: $1 (that’s not a typo!)

Ready to take the next step?

The MEDIUM guide is for intermediate investors, requiring more involvement.

The ADVANCED guide is designed for the most experienced investors.

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