Everyone has told you that you need to get a retirement fund started. You set it up at work or open an IRA with a low-cost brokerage firm like Vanguard or Fidelity. But now you have no idea what kind of funds you’re supposed to be investing in. Here are some super simple investing options for those who have no idea what to invest in and want a minimal amount of work.
Set It and Forget It- Target-Date Index Funds (Level 101)
If you want to get a balanced amount of growth and secure income, without ever having to make any future adjustments on your own, the simplest fund you can get is a target-date index fund.
You simply pick the one that is closest to the year that you turn 65 (or whatever later date you plan to retire).
Target-Date funds usually have a balance of stock and bond funds (both U.S. domestic-based and international). They are designed for more growth (higher stock ratio) in your younger years and become more income-based but less growth (higher bond ratio) in your designated retirement years.
Where to Find Target-Date Funds
Most employer-sponsored plans have a target-date fund available. If you want to just set it and forget it without worrying about adjusting or managing your retirement accounts over the years, stick with target-date funds.
For your Individual Retirement Account (IRA), invest in low-cost index funds with brokerage firms like Vanguard or Fidelity.
You can expect target-date index funds to have an annual expense fee of about 0.15% to 0.75% of the total fund amount. This is much lower than many mutual fund companies who charge 1-5% of managed funds, allowing you to keep more of your own money, so it can grow for you.
When looking at where to open an IRA, compare the numbers, higher minimum deposits often allow for lower fees but saving those initial deposits can be hard.
In recent years, ETFs (Exchange Traded Funds) have become available at many Brokerage Firms. ETFs allow you to purchase index funds one share at a time. So they may be an easier entry point for many new investors.
*As of July 28, 2021, per their websites | Minimum Opening Deposit | Annual Expense Rate | Additional Deposit Minimums |
Vanguard Target-Date Funds | $1,000 | 0.15% | none |
Fidelity Freedom Date Funds | $0 | 0.63-0.75% | none |
T.Rowe Price Retirement Fund | $2,500 | 0.52-0.63 | none |
(As we learned in 2021, target-date funds are best held in tax-advantaged funds like IRAs and 401ks. Read What Happened When Vanguard Changed Its Asset Allocation requirements in 2021. Because they rebalance so often, target-date funds can trigger capital gains within the fund, even though the actual fund didn’t change. This is fine when they’re owned in tax-advantaged accounts, but can mean large tax bills when held in a regular taxable brokerage account.
4 Fund- Do It Yourself (Level 102)
If you want to be a bit more involved in your retirement account, a 4 Fund setup may be better for you. You will have more control and can possibly keep costs down a little compared to target-date funds. And if your employer plan simply does not offer target-date funds, you create a super simple 4 fund plan:
- Total Stock Market Fund
- Total International Stock Market Fund
- Total Bond Market Fund
- Total International Bond Market Fund
These are usually the exact funds that are in Target-Date Funds anyways, you are just going to control the ratio of each throughout the years, saving some fees by managing yourself.
1. Total Stock Market Fund-
A total stock market fund includes every single stock available in the United States. It tracks the entire stock market so it goes up and down with the flow of the market.
The wonderful thing about a total stock market fund is that if a single company goes bankrupt or out of business, it is simply dropped from the fund. It may make the Fund price drop a small amount but it will never go down to $0 which could happen if you owned an individual Company’s stock.
2. Total International Stock Fund
Like the total stock market fund, which tracks domestic US stocks, the total international stock fund tracks all the other stocks, throughout the world, that are not US-based.
3. Total Bond Market Fund
The Total Bond Market fund tracks all of the bonds available in the US. While stock is owning a portion of a company, a bond is a loan given to a company or government entity. Their prices are based on the interest and credit worthiness of the company or entity taking out the loan. Same as with the total stock fund, if a bond expires or the company or government entity defaults on the loan, it is just removed from the fund.
4. Total International Bond Fund
Same as the international stock fund, it just tracks all the bonds available on the market, not based in the US.
How to set up a Super Simple 4-Fund
The easiest way to set up your funds for age-based growth through the years is to follow the equation:
% of stocks in account = 120 – your age (Up until you reach 60 years old)
Historically, to ensure you still achieve growth while limiting losses during your retirement draw-down years, the ideal ratio has been 60% stocks and 40% bonds.
Once you know your stock to bond ratio, you should set up your account and rebalance it every year by putting more or less into the correct accounts to get you back to your desired ratios.
Stocks:
67%- Total Stock Market Fund
33%- Total International Stock Market Fund
Bonds:
67% – Total Bond Market Fund
33% – Total International Bond Market Fund
7 Fund- Do It Yourself (level 201)
If you are starting to get comfortable with managing your own funds and want to add a little bit more growth opportunity and diversification you can add:
- Total Small Cap Funds
- Total Small Cap International Funds
- Total REIT (Real Estate Investment Trust) Funds
The Total Stock Market Fund is made up of all the businesses in the US but is heavy in Large Cap funds (big businesses, like Coke and Proctor and Gamble). Big businesses have such high stock prices, they take up more space in the fund. They are established companies that are reliable but don’t grow much anymore.
5. Total Small Cap Funds
Small Caps are made up of smaller companies that are just starting and have more potential to grow. Think Microsoft in the 80s. Many new businesses don’t make it, so there is more swing in a Small Cap Fund’s value.
The nice thing about Index funds is if a business dies, it just goes away, it doesn’t drag the whole fund to $0. And as new small businesses, small-cap companies have lots of room to grow and expand, bringing lots of growth to their stock price and more money for you in the long term.
6. Total Small Cap International Funds
Small Companies throughout the world, outside of the US
7. Total REIT Funds
Real Estate Investment Trusts (REITs) are companies that invest in Real Estate: Business buildings, rental homes or buildings, hospitals, etc. They use the money from their investors and buy different forms of Real Estate. They then remodel and sell some of them, sharing the profits with their investors, or rent them out and share the rental income with their investors in dividends.
If you want to add these three funds to your investment portfolio, just put them in the stock portion creating a stock ratio kind of like this:
Stocks:
47%- Total Stock Market Fund
10%- Small Cap Fund
10%- REIT Fund
23%- Total International Stock Market Fund
10%- Small Cap International Fund
Bonds:
67% – Total Bond Market Fund
33% – Total International Bond Market Fund
This is my personal preference but every person’s situation is different.
-If you are more opposed to risk, swing your bond ratio higher earlier, just know that you may not gain as much growth. REITs are a good option to add a bit of steady diversification as the bond market has been down for the last few years.
-If you are more comfortable with risk to earn higher gains, go ahead and keep your stock ratio higher longer, maybe even up your small-cap funds a little bit. But realize that there will be a lot more swings throughout the years and you don’t want to freak out during a down market and sell out of fear.
Wrap-Up
Look deep into yourself and decide how much work you are willing to put into managing your retirement account. If you are willing to pay slightly higher fees so you never have to touch it again, go for a target-date fund. But if you don’t have that option or want to save on fees by putting in a little bit more work, set up a 4 fund account and adjust every year as needed.
If you’re getting comfortable managing your accounts and can emotionally handle larger daily swings in exchange for higher returns, go for the 7 fund account. But always pay attention to how you feel looking at your accounts, if big dips and swings make you anxious, rebalance for less aggressive growth because you need to be able to sleep at night while your money grows.
Super Simple Investing
- Set It and Forget It- Target-Date Index Funds (Level 101)
- 4 Fund- Do It Yourself (Level 102)
- Total Stock Market Fund
- Total International Stock Market Fund
- Total Bond Market Fund
- Total International Bond Market Fund
- 7 Fund- Do It Yourself (Level 201)
- Total Stock Market Fund
- Total International Stock Market Fund
- Total Bond Market Fund
- Total International Bond Market Fund
- Total Small Cap Funds
- Total Small Cap International Funds
- Total REIT (Real Estate Investment Trust) Funds
Have you set up your retirement accounts? How have you set them up for different points in life?
Just the information I was looking for. I want to invest but had no idea where to start.
Starting out simple is often the best way to go. If you want to learn more and add on down the road, that’s great, but the most important thing is to get started as early as possible.
Great information laid out in a very easy to understand way! Highly recommend!!!
Thank you!