Investing In Index Funds For Retirement

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Open A Brokerage Account And Buy Index Fund Shares

Index fund investing for retirement? | The Dough how

If you want to learn how to invest in index funds, you’ll want to choose an investing strategy and go from there. For example, do you want to DIY it or have professional help? Your answer will determine what type of investment account you’ll need to purchase index fund shares.

“Investors first must decide if they want to pick the index funds themselves and manage the allocations directly. If the investor feels this is the best route for them, they can establish an investment account at any of the numerous brokerage platforms such as Fidelity, TD Ameritrade, Charles Schwab, or even app-based platforms such as Robinhood,” notes Schubach. “In this scenario, the investor would research the universe of index funds available and purchase the funds they’d like to own.”

You can do this by:

  • Opening an online brokerage account. You could open an account with brokerages such as Fidelity or Vanguard to manually invest in funds yourself.
  • Using a robo-advisor. You could also use a robo-advisor such as Betterment and Wealthfront which do much of the heavy lifting for you, by investing and rebalancing automatically.

“For those who wish to invest in index funds, but prefer some help, they can work with a financial advisor who can help guide them to the funds which best match their risk tolerance, and they would subsequently manage those funds for the investor,” says Schubach.

Regardless of your investment options, here are some things you want to keep in mind when choosing a brokerage.

What To Know About Index Fund Expense Ratios

Index funds are still funds, which means they require a bit of money to manage.

The expense ratio is the cost of maintaining the fund. That includes the cost of buying and selling assets in the fund, the salaries of its managers, the physical overhead of the fund manager and anything else that requires money to keep the fund going. The formula for an expense ratio is Total Costs of the Fund divided by the Total Assets of the Fund: TC/TA.

Actively managed mutual funds have gotten cheaper since the turn of the millennium, as have all other investments. In 2000, the average mutual fund total cost could exceed 1%. And when your funds top-line return is only 5%, that means youre getting 20% less than if you invested the money on your own.

Now the average cost for mutual funds and ETFs is 0.45%, according to Ben Johnson at Morningstar. Still, thats quite a bit higher than the 0.08% you pay for holding the Vanguard Total International Stock Index Fund mentioned above.

Funds and ETFs list their expense ratios in their prospectuses. If youre in the market for an index fund, be sure to see how much it costs to own as well as its past performance.

Vanguard Ftse Social Index Fund Admiral Shares

Expense Ratio: 0.14% per year

Environmental, social and governance investing is often viewed as a concept reserved for a young audience. This is primarily due to the issuers of these products targeting millennials and members of Generation Z. That said, though, there are no age restrictions or requirements for embracing the benefits of ESG. And therefore, the Vanguard FTSE Social Index Fund Admiral Shares is a solid choice for any investors looking to get their feet wet in the ESG fund arena.

VFTAX, which carries a $3,000 minimum investment, has a traditional ESG approach. According to Vanguard, it excludes stocks of certain companies in the following industries: adult entertainment, alcohol, tobacco, weapons, fossil fuels, gambling, and nuclear power.

Even with those exclusions, this Vanguard index fund still has a lineup of 477 stocks and some of the industries that are barred from the fund are struggling right now. So, VFTAX may offer better near-term returns than the S& P 500.

Due to whats left out, many ESG funds VFTAX included often overweight other sectors. Fortunately, though, that can and does usually included tech and healthcare which combine for more than 47% of VFTAXs weight.

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What Are Low Cost Index Funds

Low-cost index funds are among the most advantageous investment vehicles for those focused on the long term. It’s important to know a fund’s expense ratio, which denotes how much money in management fees you’ll pay, before investing your hard-earned dollars. Here are some top low cost index funds and their expense ratios:

  • Vanguard S& P 500 ETF 0.03%
  • Vanguard Large-Cap ETF 0.04%

Fidelity Zero Large Cap Index Fund

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Expense Ratio: 0% per year

The Fidelity ZERO Large Cap Index Fund offers all of the same benefits of the aforementioned FZROX. But the primary difference being the two is that the FNILX focuses on domestic large-cap equities, making it an alternative to the S& P 500 or Russell 1000 tracking funds, essentially all of which carry fees.

With FNILX, investors will get a portfolio that looks similar to those of index funds and ETFs that track well-known U.S. equity benchmarks meaning technology, healthcare and financial services are the top three sector weights.

The top 10 holdings in FNILX which currently represent 24.53% of the funds weight include Apple , Microsoft and JPMorgan Chase . This is also considered a large blend fund, but lacks the exposure to smaller companies found in the FZROX fund.

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Investing In Balanced Funds

Like retirement income funds, balanced funds are mutual funds that provide a combination of underlying investment assets, such as stocks, bonds, and cash. Unlike retirement income funds, balanced funds are typically riskier than retirement income funds.

Also called hybrid funds or asset allocation funds, the asset allocation remains relatively fixed and serves a stated purpose or investment style. For example, a conservative balanced fund might invest in a conservative mix of underlying investment assets, such as 40% stocks, 50% bonds, and 10% money market. You can also find balanced funds that are moderate or aggressive , if those better fit your needs.

Model Portfolios Make Fund Selection Easy

Once you’ve committed to diversifying through mutual funds for retirement, the next question is: Which funds are best for you? Some finance experts have created so-called lazy portfolios aimed at people who plan to hold their investments for the long term. You can simply recreate these portfolios in your 401, individual retirement account or other retirement account. You can even spread your lazy portfolio across all of your various accounts, by investing in one mutual fund in one account, another fund in another account, and so on.

The beauty of these types of portfolios is that you can build them using similar funds from various mutual fund companies.

» MORE:What’s a typical mutual fund expense ratio?

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Continue To Manage Your Investments

Once you’ve started investing in index funds you want to do two things:

1. Continue to invest regularly. This may mean setting up automatic monthly contributions or setting a schedule when you add more money to your portfolio.

2. Check in regularly with your investments. Consider checking in on your investments at least once a year. You can also consider checking in quarterly. Many index funds rebalance on their own, but it’s a good idea to check that your funds are still in alignment with your portfolio’s goals.

Fidelity Zero Large Cap Index

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The Fidelity ZERO Large Cap Index mutual fund is part of the investment companys foray into mutual funds with no expense ratio, thus its ZERO moniker. The fund doesnt officially track the S& P 500 technically it follows the Fidelity U.S. Large Cap Index but the difference is academic. The real difference is that investor-friendly Fidelity doesnt have to cough up a licensing fee to use the S& P name, keeping costs lower for investors.

Expense ratio: 0 percent. That means every $10,000 invested would cost $0 annually.

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NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Our estimates are based on past market performance, and past performance is not a guarantee of future performance.

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Vanguard Dividend Growth Index Fund

Expense Ratio: 0.22% per year

Income is an essential part of the retirement equation. That said, the Vanguard Dividend Growth Index Fund is an example of a fund that delivers the goods for investors. What makes this Vanguard product alluring is that it emphasizes dividend growth, not yield. Some companies with high dividend yields may be strained by those payouts, and that stress can lead to dividend cuts and suspensions.

But those arent the type of names dotting VDIGXs focused roster of 42 components, which have an average market capitalization of $110.6 billion.

The fund focuses on high-quality companies that have both the ability and the commitment to grow their dividends over time, according to Vanguard.

Moreover, industrial and consumer staples names combine for more than 36% of the funds roster. VDIGX has a minimum investment of $3,000, a price of admission plenty of market participants are willing to pay as highlighted by the funds $39.5 billion in assets under management.

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How Do You Make Money From Mutual Funds

When mutual funds increase in value, the profit is shared with the investors. That distribution can then be reinvested to buy more shares of the stock. Those shares make more profit, which can be reinvested and on and on. Everybody wins!

We want you to hear us loud and clearthe most important factor in making money from mutual funds is investing consistently for a long period of time. Thats right, how long you keep your money invested is even more important than what funds you choose to invest in!

Will there be ups and downs investing in the stock market? Of course! But historically, most people make money in the long run if theyre patient. Just look at the S& P 500, for example. The S& P 500 tracks the performance of stocks from the 500 largest, most stable companies in the U.S., and it has an average annual return between 1112% from 1928 to 2020.1

Thats why you want to use a buy-and-hold strategy when investing in mutual funds. Dont try to time the market by buying and selling based on trends. Choose investments with a long history of above-average returns, and stick with them for the long haul. Remember, saving for retirement is a marathonnot a sprint!

How Much Money Do You Need To Start Investing In Index Funds

Investing In Index Funds For Retirement Vs Mutual Funds

It really all depends on the brokerage company that you use and the specific index fund that you are looking at.

Many popular index funds have a 0$ minimum investment, while some have $1,000 minimum investments or higher.

Vanguard has an interesting setup in that they offer two versions of their index fundsInvestor shares and Admiral shares.

  • The Investor shares have a lower minimum investment but a slightly higher expense ratio.
  • Whats really great though is that once your account balance is high enough to qualify for Admiral shares of the fund, Vanguard will automatically graduate you up.

VTSAX, which gets a lot of love around here, is the Admiral share version of Vanguards Total Stock Market Index fund.

Related:How To Buy VTSAX

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Tax Planning Tips For Retirement Savings

In general, if you expect to be in a higher federal tax bracket in retirement, the Roth IRA is best. If you expect to be in a lower tax bracket, which is most common, the traditional IRA is best. If you will be in the same tax bracket, it doesn’t matter which one you use. You may also consider using a regular brokerage account as an alternative. You may also use a combination of all three, and don’t forget about your 401! Above all, knowing what federal tax bracket you will be in at the beginning of retirement will be your biggest challenge. It is also important to have the best asset location .

Investors Still Prefer Index Funds For New Money

With the S& P 500 down over 10% this year and the tech-heavy Nasdaq composite off 18%, some of the best mutual funds and ETFs are treading on thin ice. But despite seeing overall weak flows, index funds still amassed $15.3 billion in assets in the first quarter, while active funds lost $6 billion.

Weakness in the market likely spurred some investors to pour money into some index funds, noted a Morningstar Direct report. And as markets declined, areas like alternative investments served as portfolio diversifiers. Alternative funds’ assets grew 9.3% in the third quarter. That’s the third-highest of any category group and their highest growth since 2011, reports Morningstar.

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What Is An Index Fund

Strictly speaking, an index fund can be either an exchange traded fund or a mutual fund. However, theyre most commonly ETFs, while most mutual funds are actively managed.

An index fund is essentially a portfolio of stocks tied to a specific index.

For example, probably the most common index the funds are tied to is the popularly tracked and quoted S& P 500 Index. The index represents stock in the approximately 500 largest publicly traded companies in the US.

Using the S& P 500 index as an example there are many other indexes that well cover in this guide the index fund matches the composition of the index, including a proportional interest in each of the 500 or so stocks the index includes.

In that way, the index fund tracks the S& P 500 index with almost mathematical precision.

Though the investor will never outperform the market because the index is the market he or she will never underperform it either.

Because an index fund tracks and underlying index, its referred to as passive investing. Its passive because the fund doesnt actively trade stocks, looking to increase holdings in top performers, while selling off laggards.

Instead, the fund stays invested in the companies that make up the index. This leads to very little trading activity within an index fund. The fund will buy or sell shares only when theres a change in the index.

For example, that might happen when new stocks are added to the index, or existing ones are dropped.

Investing With A 401 Vs Index Funds

Three Fidelity Index Funds For Investors Approaching Retirement

Index funds are low-cost mutual funds designed to track the performance of groups of stocks, and 401 accounts are tax-advantaged retirement accounts many businesses offer to workers. These two investing vehicles provide different benefits that generally complement each other, and both figure in many investors strategies. However, sometimes investors have to choose whether to put their money in index funds or 401 plans. Here are keys to understanding pluses and minuses of each. Consider working with a financial advisor as you create or periodically modify your investment strategy.

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Spdr S& p 500 Etf Trust

The SPDR S& P 500 ETF is the granddaddy of ETFs, having been founded all the way back in 1993. It helped kick off the wave of ETF investing that has become so popular today. With hundreds of billions in the fund, its among the most popular ETFs. The fund is sponsored by State Street Global Advisors another heavyweight in the industry and it tracks the S& P 500.

Expense ratio: 0.09 percent. That means every $10,000 invested would cost $9 annually.

Index Funds For Your Retirement: Fidelity Zero Total Market Index Fund

Expense Ratio: 0% per year

Yes, the Fidelity ZERO Total Market Index Fund really doesnt have an expense ratio or annual. Plus, theres no minimum investment with this Fidelity product. So its not surprising that in less than two years, FZROX has amassed nearly $4.4 billion in assets under management.

At is core, FZROX is a basic approach to total market exposure. Its a large blend fund, meaning investors will gain exposure to both growth and value names here. What makes this Fidelity index fund appropriate for retirees or those just starting their retirement portfolios is the costs, or lack thereof. Retirees should be aiming to save as much as they can on fund fees because those savings flow directly to their wallets at a time when theyre not working.

Likewise, younger investors get the benefit of years upon years of capital appreciation and dividend reinvestment with FZROX while not paying any fees. One year of avoiding fund fees is useful. However, decades of doing so means a benefit that could be worth tens of thousands of dollars or more in the investors favor.

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