As a 24-year-old living in New York City, saving for retirement was the last thing on my mind. It was all I could do to pay my rent and student loan bill on time each month.
But I was also working as a personal finance reporter and talking to investing experts on a regular basis. And suddenly, it became impossible not to think about my long-term plan. Time and again, the professionals I spoke with said some version of this refrain:
“Don’t worry about how much you can invest. Just get started.”
At that point in time, I knew that individual company stocks weren’t the right option for me. I didn’t have the bandwidth or the budget. So it came down to choosing between target date funds and index funds. Over the past decade, I’ve tried both options and have managed
to grow my retirement fund by leaps and bounds.
How They Work
Target date funds are the investing equivalent to ordering from the prix fixe menu at brunch. For those of us prone to “analysis paralysis,” target date funds can be the key to getting out of our own way. They consist of various investments that are preselected by the investment firm itself.
Your “target date” is simply the year in which you expect to retire. For example, a 25-year-old expecting to retire at age 65 might choose the 2060 fund. Then, all you have to do is pick your fund and decide how much you want to contribute to it—the rest is up to the fund manager. Over time, they’ll automatically adjust your holdings, moving them from riskier assets like stocks to conservative assets like bonds and cash.
Now, think of index funds like hitting the buffet line at a wedding reception. Servers dole out tiny portions of each item, allowing you to try a little bit of everything. You might decide to go heavy on the baked ziti and opt for a smaller portion of the filet mignon.
An index fund typically tries to match the performance of a broad market, like the U.S.-based S&P 500. Unlike a target date fund, you’ve got more control with index funds and can choose a selection of funds that make up a well-diversified portfolio that you can adjust over time. For example, when you’re younger, you might want to put more of your cash into index funds that track domestic and international stock markets and a smaller amount in bond index funds and cash.
What They Cost
Both of these funds are excellent low-cost investing options. Target date funds tend to be a bit more expensive, because they involve some extra work on the investment firm’s part.
For example, as of July 2021, a Vanguard Total Stock Market index fund has an expense ratio of 0.04% and a minimum investment requirement of $3,000. A Vanguard target date 2055 fund has an expense ratio of 0.15% and a minimum investment of $1,000.
Best of Both Worlds
When I was a newbie investor, the best thing I ever did was open a target date fund. If I had waited until I felt knowledgeable enough to choose my own investments, I would have missed out on months, or even years, of returns. I invested about $3,000 my first year and managed to grow that amount times 10 over the next few years.
Eventually I felt ready to choose my own investment holdings, selected a handful of different index funds within my 401(k) and ditched my trusty old target date fund. Now less of my investment gains are going back into the brokerage firm’s pockets as fees.
If these funds don’t feel like the right investment tool for you, pick something else! You have so many more options today than I did back then—not to mention robo-advisors like Betterment and Wealthfront that make it even easier to get in the market.
My biggest piece of advice? Just get started.
Illustration: Pui Yan Fong; Inset Portrait: Courtesy Mandi Woodruff/Shanes Focus Photography
Millie content is licensed from Meredith Corporation, publisher of Millie, Real Simple, InStyle and more.
Mandi Woodruff-Santos is a career and finance expert and co-host of the Brown Ambition podcast with Tiffany “The Budgetnista” Aliche.