Someone who is 55 and wants to retire in 15 years, for example, might invest in a fund targeted for 2025. Vanguard's Target Retirement 2025 Fund, for example, currently has 60 percent of assets in domestic stock funds, 15 percent in international stock funds, and 25 percent in bond funds. At the target date, that breakdown will be more like 40-10-50. The fund, which has lower expenses than its peers, was down more than 5 percent on average for the past three years, but up nearly 14 percent for the year ended June 30.
One significant caveat: Investors must be comfortable with their fund's projected stock allocation as it nears its target date. When the market imploded in 2008, some funds with 2010 target dates suffered significant losses—24 percent on average, according to the Securities and Exchange Commission—because they had fairly hefty holdings in stock. The meaning of the dates in the funds' titles varies from firm to firm; some funds don't reach their most conservative allocation until many years after the target date. The 2010 funds rebounded in 2009 with average returns of 22 percent, but public outcry and proposed action by members of Congress led the SEC this spring to propose additional disclosure in the funds' marketing materials, such as graphs outlining asset allocation over the full life of the fund.
People close to retirement and looking for some certainty might want to weigh a single premium immediate annuity. An SPIA, essentially a contract with an insurance company, provides a fixed, guaranteed stream of payouts for life in exchange for a lump-sum payment up front. For example, a 67-year-old Massachusetts man could hand over $100,000 and receive $663 per month until he died, according to the quote service www.immediateannuities.com. You still need to make your decision with care. Guaranteed payments depend on the insurance company being around to make them.