Mutual Funds
Retire on Autopilot
One-stop funds let you invest and forget it.
By Thomas M. Anderson, Associate Editor
From Kiplinger's Personal Finance magazine, August 2007
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If you'd rather spend more time at the beach or on the links and less time fretting over your investments, relax. Retirees have plenty of one-stop fund options to choose from. Target-date retirement funds, which allow you to pick the fund whose asset allocation is geared to your expected retirement date, typically include a choice for investors who have already reached their target dates. In choosing the right retirement-income fund, avoid those that heap an additional layer of fees on top of the expenses of the underlying funds. Total annual expenses for one-stop life-cycle funds should be less than 1%.
After fees, asset mix is the most important factor in determining which retirement-income fund is best for you. Funds from Fidelity, T. Rowe Price and Vanguard all have low fees, but each has a slightly different investing strategy.
Vanguard Target Retirement Income (symbol VTINX) has just 30% of its assets in stock funds (all index funds, incidentally), and it charges a rock-bottom fee of 0.21% a year. Fidelity Freedom Income (FFFAX) is even more conservative, with just 20% in stock funds. Its expense ratio is a modest 0.55%.
Our favorite is T. Rowe Price Retirement Income (TRRIX). It has about 40% of its assets in stock funds, including some that are closed to new investors, and a reasonable 0.56% expense ratio. The higher allocation to stock funds has boosted performance without adding much volatility compared with other retirement-income funds. Over the past three years to June 1, the Price fund returned an annualized 9%. That beats the three-year record of the Vanguard fund to June 1 by an average of two percentage points per year, and outpaces the Fidelity fund by an average of three percentage points a year.