Types of Retirement Funds
Retirement funds come in several broad categories, each designed with a different investment philosophy and risk profile. Understanding these categories is the first step in building a retirement portfolio that matches your goals and time horizon. The four most common types of retirement funds are target-date funds, balanced funds, index funds, and dividend income funds.
Target-Date Funds
Target-date funds (also called lifecycle funds) are designed as all-in-one retirement solutions. You choose a fund with a year close to your expected retirement date, and the fund manager automatically adjusts the asset allocation over time. When the target date is far away, the fund holds a higher percentage of stocks for growth. As the date approaches, it gradually shifts toward bonds and other conservative holdings. This automatic adjustment, known as a glide path, removes the need for you to manually rebalance your portfolio.
Target-date funds are the default investment option in many employer-sponsored 401(k) plans. Their simplicity makes them popular with investors who prefer a set-it-and-forget-it approach. The trade-off is that you have less control over the specific asset allocation, and expense ratios can be higher than those of individual index funds.
Balanced Funds
Balanced funds maintain a relatively fixed mix of stocks and bonds, typically in the range of 60% stocks and 40% bonds, though the exact ratio varies by fund. Unlike target-date funds, balanced funds do not automatically shift their allocation as you age. The fund manager rebalances the portfolio periodically to maintain the target mix, but the overall strategy stays consistent over time.
Balanced funds can serve as a core retirement holding for investors who want built-in diversification without the age-based glide path. They tend to have lower expense ratios than target-date funds and give investors more flexibility to combine them with other holdings. However, you are responsible for adjusting your overall portfolio allocation as you get closer to retirement.
Index Funds
Index funds track a specific market index, such as the S&P 500 or the total U.S. stock market. They aim to match the performance of their benchmark index rather than trying to outperform it through active stock selection. Because index funds are passively managed, they typically carry very low expense ratios, often below 0.10% per year.
For retirement investors, broad-market index funds provide diversified exposure to hundreds or thousands of stocks at minimal cost. Research consistently shows that low-cost index funds outperform the majority of actively managed funds over long time periods, primarily because of their fee advantage. An index fund can serve as the equity component of a retirement portfolio, but you will need to pair it with bond funds and manage your own asset allocation.
Dividend Income Funds
Dividend income funds focus on stocks that pay regular dividends, such as established utility companies, consumer staples manufacturers, and real estate investment trusts (REITs). These funds aim to provide a steady stream of income in addition to potential capital appreciation. They tend to hold more mature, financially stable companies and can be less volatile than growth-oriented funds.
In a retirement context, dividend income funds are often used to generate cash flow during retirement or as a conservative equity allocation for investors nearing or in retirement. The income from dividends can supplement Social Security, pensions, and other retirement income sources. However, dividend funds are still equity investments and carry market risk.
How We Selected These Funds
The funds listed on this page were selected based on a combination of factors that matter most to long-term retirement investors. This is an educational overview, not a ranking or recommendation. The selection criteria included the following considerations:
It is important to note that inclusion on this list does not constitute an endorsement. Fund performance, fees, and management can change. Always review the most current prospectus and consult a financial professional before investing.
Retirement Fund Comparison
The following table provides a side-by-side comparison of notable retirement funds across several categories. Expense ratios and performance figures are approximate and based on publicly available data. These numbers can change, so verify current figures with the fund provider before making any investment decisions.
| Fund Name | Ticker | Expense Ratio | Category | 10-Year Return | Min Investment |
|---|---|---|---|---|---|
| Vanguard Target Retirement 2050 | VFIFX | 0.08% | Best Target-Date | ~8.5% | $1,000 |
| Fidelity Freedom 2050 | FFFHX | 0.75% | Target-Date | ~7.8% | $0 |
| Schwab Target 2050 Index | SWYMX | 0.08% | Best Low-Cost | ~8.3% | $0 |
| T. Rowe Price Retirement 2050 | TRRMX | 0.62% | Target-Date | ~8.7% | $2,500 |
| Vanguard LifeStrategy Growth | VASGX | 0.14% | Best Balanced | ~8.1% | $3,000 |
| Vanguard Wellesley Income | VWINX | 0.23% | Best Income | ~5.8% | $3,000 |
| Fidelity Balanced | FBALX | 0.52% | Balanced | ~8.9% | $0 |
| Vanguard Total Stock Market Index | VTSAX | 0.04% | Best Low-Cost | ~11.4% | $3,000 |
Best Target-Date Funds
Among the target-date funds in the comparison, Vanguard Target Retirement 2050 (VFIFX) stands out for its extremely low expense ratio of 0.08%. Vanguard constructs its target-date funds using a handful of its own low-cost index funds, which keeps total costs to a minimum. The fund holds a globally diversified mix of U.S. stocks, international stocks, U.S. bonds, and international bonds through four underlying Vanguard index funds.
Schwab Target 2050 Index (SWYMX) offers a similarly low expense ratio and has no minimum investment requirement, making it accessible to investors who are just getting started. Schwab's target-date funds also use an index-based approach, which keeps costs down and provides broad market exposure.
T. Rowe Price Retirement 2050 (TRRMX) takes an actively managed approach, which results in a higher expense ratio but has historically produced competitive returns. The fund uses a blend of actively managed T. Rowe Price funds across multiple asset classes. Active management can add value in certain market environments but also introduces the risk of underperformance relative to index-based alternatives.
Fidelity Freedom 2050 (FFFHX) is another actively managed option with no minimum investment. Fidelity also offers a lower-cost index version of its target-date lineup called Fidelity Freedom Index funds, which carry expense ratios comparable to Vanguard and Schwab. If cost is a primary concern, the index version may be the better choice within the Fidelity family.
Best Balanced and Income Funds
Vanguard LifeStrategy Growth (VASGX) maintains an allocation of approximately 80% stocks and 20% bonds. This is a more aggressive balanced fund suitable for investors with a longer time horizon or higher risk tolerance. It provides global diversification through four underlying Vanguard index funds and is rebalanced regularly to maintain its target allocation.
Vanguard Wellesley Income (VWINX) is one of the oldest balanced funds in the United States, with a history dating back to 1970. It maintains a conservative allocation of roughly 35% stocks and 65% bonds, making it more appropriate for investors who are at or near retirement and prioritize income and capital preservation. The fund is actively managed by Wellington Management and focuses on dividend-paying stocks and investment-grade bonds.
Fidelity Balanced (FBALX) holds approximately 60% stocks and 40% bonds and is actively managed by a team of Fidelity portfolio managers. It has a strong long-term track record and no minimum investment requirement. The fund invests across a wide range of U.S. and international securities, providing built-in diversification for investors who want a single-fund solution without the automatic glide path of a target-date fund.
Best Low-Cost Index Option
Vanguard Total Stock Market Index (VTSAX) is not a retirement fund in the traditional all-in-one sense, but it is one of the most widely used building blocks in retirement portfolios. With an expense ratio of just 0.04%, it provides exposure to virtually the entire U.S. stock market, including large-cap, mid-cap, and small-cap stocks. Over long time periods, the total stock market has historically delivered strong returns, though with significant year-to-year volatility.
Investors who use VTSAX as a core retirement holding typically pair it with a bond index fund (such as Vanguard Total Bond Market Index, VBTLX) and potentially an international stock fund to build a diversified portfolio. This do-it-yourself approach requires more effort than using a target-date fund, but it gives you precise control over your asset allocation and can result in the lowest possible overall fees.
Target-Date Funds Explained
Target-date funds deserve special attention because they are the most common type of retirement fund and the default option in many employer-sponsored retirement plans. Understanding how they work can help you decide whether they are the right choice for your situation.
How the Glide Path Works
Every target-date fund follows a glide path, which is the schedule by which the fund shifts its asset allocation from aggressive (mostly stocks) to conservative (mostly bonds) over time. When you are young and have decades until retirement, the fund holds a high percentage of stocks, typically 80% to 90%. As the target retirement year approaches, the fund gradually reduces stock exposure and increases bond holdings to protect against short-term market declines.
| Years to Retirement | Typical Stock Allocation | Typical Bond Allocation | Risk Level |
|---|---|---|---|
| 30+ years | 85-90% | 10-15% | Aggressive |
| 20 years | 75-80% | 20-25% | Moderately Aggressive |
| 10 years | 60-70% | 30-40% | Moderate |
| At retirement | 40-50% | 50-60% | Moderately Conservative |
| 10+ years into retirement | 25-35% | 65-75% | Conservative |
"To" vs. "Through" Retirement
An important distinction among target-date funds is whether the glide path is designed "to" retirement or "through" retirement. A "to" fund reaches its most conservative allocation on the target date and stays there. A "through" fund continues adjusting the allocation for 10 to 15 years after the target date before stabilizing. Vanguard and Fidelity use "through" approaches, meaning their funds still hold a meaningful stock allocation at the target date and continue shifting toward bonds in the early years of retirement. The "through" approach reflects the reality that many retirees have a 25-to-30-year retirement horizon and need continued growth to offset inflation.
Advantages and Limitations
The primary advantage of target-date funds is simplicity. A single investment provides a diversified, professionally managed portfolio that automatically adjusts over time. This is particularly valuable for investors who do not want to actively manage their retirement savings. Target-date funds also enforce disciplined rebalancing, which prevents the common mistake of letting a portfolio drift toward an inappropriate risk level.
The main limitations are cost and lack of customization. Some target-date funds charge higher expense ratios than the individual index funds they contain. Additionally, the one-size-fits-most glide path may not match every investor's specific circumstances. For example, someone with a pension and Social Security might be comfortable with more stock exposure in retirement than a standard target-date glide path provides. Conversely, someone with significant debt or irregular income might need a more conservative approach earlier in life.
How to Choose Retirement Funds by Age
Your age and the number of years until retirement are among the most important factors in choosing retirement funds. While there is no single formula that works for everyone, general guidelines can help you think about appropriate fund types and asset allocations at different life stages.
In Your 20s and 30s (30+ Years to Retirement)
With several decades until retirement, you have the luxury of time to ride out market downturns and benefit from the long-term growth potential of stocks. At this stage, growth-oriented investments are generally appropriate. A target-date fund with a distant target year, a broad stock market index fund, or an aggressive balanced fund like Vanguard LifeStrategy Growth (VASGX) could serve as a core holding. The focus should be on consistent contributions, low fees, and broad diversification rather than trying to pick winning stocks.
In Your 40s (15-25 Years to Retirement)
This is typically the peak earning period, and retirement starts to feel more real. Your portfolio should still be growth-oriented but with some attention to risk management. A target-date fund automatically handles this transition. If you are building your own portfolio, you might begin shifting from an 80/20 stock-to-bond ratio toward something closer to 70/30. This is also a good time to evaluate whether your retirement savings are on track and to increase contribution rates if possible.
In Your 50s (5-15 Years to Retirement)
As retirement approaches, capital preservation becomes increasingly important. A market decline in the years just before or after retirement can have a severe impact on your retirement income, a risk known as sequence-of-returns risk. You might consider shifting toward balanced funds, increasing bond exposure, or choosing a target-date fund that is now well into its glide path. Funds like Fidelity Balanced (FBALX) or a target-date fund with a near-term date can provide moderate growth with built-in downside protection.
In Your 60s and Beyond (At or In Retirement)
In retirement, the priority shifts toward generating income and preserving capital while maintaining enough growth to keep up with inflation over a potentially long retirement. Conservative balanced funds like Vanguard Wellesley Income (VWINX) are designed for this purpose. Dividend income funds can also play a role by providing regular cash distributions. However, most financial professionals caution against moving entirely out of stocks, because inflation can erode the purchasing power of a purely bond-based portfolio over a 20-to-30-year retirement.
IRA vs. 401(k) Fund Options
The type of retirement account you use affects which funds are available to you and the costs you pay. Understanding the differences between IRA and 401(k) fund options can help you make better investment decisions across all of your retirement accounts.
401(k) Plan Fund Options
In a 401(k) or similar employer-sponsored plan (403(b), 457, TSP), your investment choices are limited to a menu of funds selected by your employer and the plan administrator. A typical 401(k) plan offers between 10 and 30 fund options, usually including a selection of target-date funds, a few index funds, some actively managed stock and bond funds, and a stable value or money market option.
The quality and cost of 401(k) fund options varies significantly from plan to plan. Some employers negotiate access to low-cost institutional share classes that are not available to individual investors. Others offer plans with limited, high-cost fund options. If your plan has expensive funds, it may make sense to contribute only enough to capture any employer match and then direct additional retirement savings to an IRA where you have more control over fund selection.
To learn more about how 401(k) plans work and how to maximize your employer match, see our 401(k) Basics Guide.
IRA Fund Options
An Individual Retirement Account (IRA) gives you access to virtually any publicly available mutual fund, exchange-traded fund (ETF), stock, or bond. This freedom is one of the key advantages of an IRA over a 401(k). You can choose the lowest-cost funds available, build a precisely customized portfolio, and switch between funds without being limited to your employer's plan menu.
Both Traditional IRAs and Roth IRAs offer the same investment options. The difference between them is the tax treatment: Traditional IRA contributions may be tax-deductible, with taxes owed on withdrawals in retirement. Roth IRA contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free. The choice between them depends on your current tax bracket, expected future tax bracket, and retirement timeline.
Coordinating IRA and 401(k) Investments
If you have both a 401(k) and an IRA, consider your investments across both accounts as a single portfolio. For example, if your 401(k) offers an excellent low-cost S&P 500 index fund, you might use that for your stock allocation and use your IRA for bond funds, international funds, or other asset classes that your 401(k) does not cover well. This approach, sometimes called asset location, allows you to take advantage of the best options in each account.
For a deeper understanding of retirement investment strategies, visit our Retirement Investment Basics guide. If you are evaluating target-date funds for your 401(k) or IRA, our Target-Date Funds Guide provides detailed comparisons of glide paths and fund providers.
Key Factors When Evaluating Retirement Funds
Beyond the fund type and category, several specific factors should inform your decision when selecting retirement funds.
Expense Ratios
The expense ratio is the annual fee expressed as a percentage of your investment. A fund with a 0.04% expense ratio charges $4 per year for every $10,000 invested, while a fund with a 0.75% expense ratio charges $75 for the same amount. Over 30 years of investing, this difference can compound into tens of thousands of dollars. Low-cost index funds from providers like Vanguard, Schwab, and Fidelity typically offer expense ratios below 0.10%, while actively managed funds often charge 0.50% to 1.00% or more.
Diversification
A good retirement fund should provide exposure to a broad range of assets. Target-date funds and balanced funds achieve this by holding multiple underlying funds across U.S. stocks, international stocks, U.S. bonds, and sometimes international bonds, real estate, or other asset classes. If you are using a single-asset fund like a total stock market index, you need to pair it with other funds to achieve adequate diversification.
Tax Efficiency
In taxable accounts (non-retirement accounts), the tax efficiency of a fund matters. Index funds tend to be more tax-efficient than actively managed funds because they trade less frequently and generate fewer taxable capital gains distributions. In tax-advantaged accounts like IRAs and 401(k)s, tax efficiency is less of a concern because gains are either tax-deferred or tax-free.
Minimum Investment Requirements
Some funds require a minimum initial investment, which can range from $0 to $3,000 or more. Vanguard's Admiral Shares and investor-class mutual funds typically require $1,000 to $3,000, while Fidelity and Schwab offer many funds with no minimum at all. If you are just starting out with limited capital, no-minimum funds or ETF versions of popular index funds (which can be purchased for the price of a single share) provide a lower barrier to entry.
