Professor Munnell said most target date funds are worthwhile, by his estimation. “Definitely participate,” she said. “Saving automatically like this is the only way for most people to save. »
If you can handle it, do some research. See what’s under the hood of the target date plan. Often you will find a variety of index funds, which is great. Make sure the cost, measured as what is called an expense ratio, is low, i.e. close to zero.
Target date funds work best in tax-sheltered accounts, including IRAs. I wouldn’t use them in an account that isn’t tax-sheltered. As I’ve written, Vanguard’s target date funds, and those of some other companies, have generated outsized tax bills for many unsuspecting investors. On Thursday, Vanguard reached a $6.25 million settlement with Massachusetts to reimburse investors there, and it faces a class action lawsuit filed in Pennsylvania.
So, stick to tax-sheltered accounts for target date funds. Use broad stock and bond index funds as core investments elsewhere.
How much should you save? It’s a personal question. If you need money to pay the bills, do that first. Postpone registration if you have to.
But it’s good to have a goal and it’s better to start early.
Set aside everything you can handle. If you’re in your 20s, Professor Munnell suggested, aim for a total of 10% of your salary. This should get you in shape decades from now. If you regularly contribute to a workplace plan, that 10% can include money your employer invests.