My sister recently graduated from graduate school and for the first time in her life has had a full-time job with a steady paycheck and benefits. Last weekend, she asked for my help because she gets a 401k but she didn’t have any idea of how to invest it. After setting up her account and reviewing what her investment options were, I thought that the best option was to sign her up for a target date fund. Specifically, Vanguard’s Target Date 2060 Fund.
What is a target date index fund?
A target date index fund is an index fund that invests in a mix of stocks and bonds (domestic and international) that is designed with specific date in mind of when you will need your money. The weighting of how much is invested in each asset class is meant to grow with the stock markets when you are far away from your target date, and get more conservative as you get closer to retirement. My sister, for example, won’t hit 65 until around the year 2060, so her target date fund is heavily weighted towards stocks, with only a small percentage invested in stocks. As she gets older, the fund will gradually move to be invested more heavily in bonds to preserve capital and reduce the risk of her losing a big portion of her savings right when she needs it.