Last week, Vanguard launched a Target Retirement 2060 Fund aimed at those people 18 to 20 years old who expect to retire 48 years from now.
Most of the people reading this and I will be pushing up daisies by then, but for anyone just starting out in life, this is a great retirement planning tool.
The fund will invest 90 percent of its assets in stocks -- a total market fund and an international stock fund. It will put only 10 percent in an index bond market fund. Over the years, as participants grow older, the allocation will shift automatically to a more conservative mix. Initially, the expense ratio for this fund is expected to be 0.18 percent -- not very much compared to the costs of many actively managed funds. Also, Vanguard is setting the investment minimum at $1,000, which is half of what they usually demand and not a huge investment, even for people who don't earn much money.
Scott Donaldson, a senior analyst in Vanguard's Investment Strategy Group, says that from 1926 to 2011, the average return on a portfolio similar to this would be just about 9 percent. No one can count on Donaldson's estimate being correct -- who knows what the stock market will do in the future. But just for the heck of it, I plugged $85 per month of savings into a Bankrate savings calculator and assumed 9 percent a year annual return. The result after 48 years was a little more than $1 million. I'm not adjusting for inflation or the up-and-down realities of stock market investments. Nevertheless, if left to grow, this is very likely to turn into a healthy nest egg.
Plus, anyone who sets up one of these accounts as a Roth IRA, using after-tax dollars, won't have to pay taxes on the earnings when she begins withdrawing them.
One of the best gifts you can give a grown child who has income but little or no retirement savings is to fund one of these accounts for him or her. "The key to retirement security is saving early," says Donaldson. So, even if you contribute for only a few years, you've given your offspring a big head start on retirement.