Savers in their 20s can now stash money away for retirement in funds that automatically chop and change their investments as they grow older.
Typically, when you’re younger it’s a good idea to invest in shares, to maximise the growth of your cash.
As you get closer to retirement, it’s generally accepted that the most sensible thing to do is gradually move money out of shares and into bonds, which are considered safer.
The problem is, many people don’t want to, or don’t feel comfortable reviewing their portfolios and picking new funds every couple of years.
As you get closer to retirement, it’s generally accepted that the most sensible thing to do is gradually move money out of shares and into bonds, which are considered safer
Now Vanguard, the US fund behemoth, has launched two that do it for you.
But are these so-called target retirement funds the best way for young savers to plan ahead?
Vanguard’s Target Retirement 2060 and 2065 funds are, as the names suggest, for savers who are in their late teens or early-to-mid 20s who plan to retire in the 2060s. To begin with, 80 per cent of your cash is invested in shares and 20 per cent in bonds in both funds.
The idea is that the shares will generate returns while the bonds will keep a decent chunk of the capital safe if the market swings wildly.
That mix stays the same until you’re about 25 years off retirement, when the fund’s manager begins shifting money out of shares and into bonds.
For example, when you hit 44, 78 per cent of your cash will be in shares and 22 per cent bonds.
To be a successful investor, you need to review your portfolio at least once a year
Over the next 20 years, the manager will continue to move money out of shares and put more into bonds until the mix reaches 30 per cent shares and 70 per cent bonds.
This mix is reached seven years after the fund’s target date – 2060 or 2065, depending on your age.
Both funds put your cash into so-called passive investments, such as trackers and exchange-traded funds (ETFs). These blindly follow an index such as the FTSE 100 or the S&P 500 in the US.
Trackers and ETFs are cheap, which brings down the cost of investing – attractive for younger savers as costs can really eat in to the performance of a fund over time.
You can also start investing from £100 a month or with an initial lump sum of £500.
However, while the Target Retirement 2060 and 2065 funds are cheap, there is no way of comparing how they are performing as the Vanguard funds are not pegged against a particular index, so it’s difficult to work out if you would be better off investing elsewhere.
To be a successful investor, you need to review your portfolio at least once a year.
However, Vanguard’s funds encourage savers to keep their investments in one place until they retire. This is what experts call ‘set and forget’.
Laith Khalaf, of Hargreaves Lansdown, says: ‘Forgetting about your investments is not a good starting point. If you put your money into a box and never look inside, then you can’t really be surprised if, when you come to open the box, you get less than you wanted.’
Khalaf tips L&G UK Index Trust, a cheaper tracker that moves with the FTSE All-Share. This means it is easy to keep tabs on its progress.
Ben Yearsley, of adviser Shore Financial Planning, believes Vanguard’s mix of shares and bonds is too conservative.
He says that younger savers are better off creating a varied portfolio investing in the UK, US, Asia, Europe and emerging markets.