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How To Save For Retirement If You Know Nothing About Investing

How to Save for Retirement if You Know Nothing About Investing

As employer pensions go the way of the dodo, the responsibility for investing retirement funds is being dropped onto the shoulders of individual workers. Of course, not everyone is comfortable with the idea of betting his future on his ability to pick the right investments. If you know nothing about investing and don’t care to learn, but want to be sure that your retirement savings will be sufficient unto the day, consider adopting one of the following strategies.

Target date funds

The target date fund is a fairly new retirement investing option. The concept is simple: you decide roughly when you plan to retire, then pick a target date fund that matches that year. For example, if you plan to retire sometime around the year 2035, you’d look for a target date fund with the year 2035 in its name. Once you find the right fund, all you need to do is deposit your contributions and the fund manager will take care of the rest: picking your investments, shifting the allocations as you age to less risky investments, rebalancing investments to keep your chosen allocations between types of investments, and so on.

Stock chart with prices
Image source: Getty images.

Index funds and ETFs

If you don’t have access to a target date fund or prefer a bit more control over your retirement investments, then an index fund or ETF is the way to go. These investments seek to track the performance of a particular stock or bond index so that as the index climbs or falls, so will the fund. Index funds have several advantages over traditional, actively managed funds: there is no need for a high-priced investment expert to pick the fund’s investments, since the index does it for them; transactions are typically far lower in an index fund, meaning you pay a lot less in transaction fees; and because index funds inherently use a buy and hold strategy rather than a timing strategy, they tend to outperform actively managed funds.

Stocks versus bonds

If you choose an index fund or ETF rather than a target date fund, you’ll have one extra decision to make: how much you want to invest in stocks versus bonds. For retirement investments, the accepted approach is to subtract your age from 110 and put that percentage of your investments in stocks, with the remainder in bonds. For example, if you’re 40 years old, you’d subtract 40 from 110 and get a result of 70. That tells you that you need to put…

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