Vanguard Mutual Funds: Best Retirement Investment Options

Vanguard mutual funds are a great option for retirement investing due to their low fees and high quality. Vanguard's unique structure as a mutual company means that investors become partners and owners, rather than just clients. Vanguard mutual funds are also highly diversified, professionally managed, and tax-efficient. With Vanguard's Target Retirement Funds, investors can choose a fund based on their anticipated retirement year, and the fund will automatically adjust its asset allocation to become more conservative as the target date approaches. This makes Vanguard's mutual funds an appealing set-it-and-forget-it investment strategy for retirement.

Target-date funds

Here's how it works:

• Diversification: Each Target Retirement Fund invests in Vanguard's broadest index funds, giving you access to thousands of U.S. and international stocks and bonds. By diversifying your investments across numerous securities, you reduce the overall investment risk.
• Professionally Managed Asset Mix: The fund managers adjust the asset allocation over time, gradually shifting from more stocks to more bonds as you get closer to retirement. This ensures that your portfolio becomes more conservative as you near retirement.
• Automatic Rebalancing: The fund managers maintain the current target mix, so you don't have to worry about ongoing rebalancing. They take care of adjusting the mix as you get closer to retirement, so your portfolio stays aligned with your chosen asset allocation.
• Low Costs: Vanguard's Target Retirement Funds have an average expense ratio that is 82% less than the industry average. Lower costs mean more money stays in your account, working for you.

When choosing a Target Retirement Fund, select the fund that aligns with your anticipated retirement year. For example, if you plan to retire in 2050, you would choose the Vanguard Target Retirement 2050 Fund (VFIFX). This fund will start with a heavier weighting in stocks and gradually transition to a heavier weighting in less risky assets as you approach retirement.

Vanguard offers a range of Target Retirement Funds with target dates through to 2070. If you're already retired, you can opt for the Vanguard Target Retirement Income Fund (VTINX), which is designed for those in retirement.

Low-cost funds

Vanguard is a popular choice for retirement investment thanks to its low-cost structure and high quality. The company's average expense ratio across its index mutual funds and ETFs is 72% lower than the industry average.

Vanguard's mutual fund offerings include passive index funds and actively managed funds. It manages some of the best-known broadly diversified stock funds, bond funds, and balanced portfolios. The company also offers diverse options that focus on specific industries and geographic markets.

Vanguard Russell 1000 Growth Index Fund (VRGWX)

This fund charges very low costs, with an annual expense ratio of just 0.07%. It tracks some of the biggest growth stocks in the U.S. and has outperformed the S&P 500 over the past decade, making it a great choice for those seeking long-term growth.

Vanguard FTSE Social Index Fund (VFTNX)

The Vanguard FTSE Social Index Fund is one of Vanguard's premier ESG funds, focusing on environmental, social, and corporate governance criteria. It avoids investment in companies engaged in adult entertainment, alcohol, tobacco, gambling, weapons, and nuclear power, among other industries. This fund is ideal for those who want their investments to align with their values.

Vanguard Growth & Income Fund (VGIAX)

The Vanguard Growth & Income Fund offers dividend income and growth of principal, making it a classic core holding for a retirement portfolio. With excellent diversification across roughly 890 stocks, this fund has outperformed the overall stock market in recent years and offers a competitive dividend yield.

Vanguard Target Retirement 2050 Fund (VFIFX)

The Vanguard Target Retirement 2050 Fund is a target-date fund that automatically adjusts its allocation between stocks and bonds over time, becoming more conservative as the target retirement date nears. This fund stands out for its low expense ratio and the fact that it invests only in other Vanguard funds, keeping costs down.

Vanguard High-Yield Corporate Fund (VWEAX)

The Vanguard High-Yield Corporate Fund is Vanguard's top-performing bond fund over the past decade. It focuses on high-yield, intermediate-term fixed-income securities and is managed by Wellington Management, which prioritizes higher-rated junk bonds to balance consistent income with minimizing defaults and loss of principal.

Vanguard High-Yield Tax-Exempt Fund (VWALX)

The Vanguard High-Yield Tax-Exempt Fund has been a top-performing municipal bond fund, offering a sustainable, high level of income that is exempt from IRS taxes. While the fund invests in lower-credit-quality holdings to boost yield, it also maintains at least 80% of its assets in investment-grade municipal bonds to dampen volatility.

Vanguard's commitment to low fees and reasonable expenses, along with its broad array of investment choices, makes it an attractive option for those seeking low-cost mutual funds for retirement.

ESG funds

Vanguard's ESG (environmental, social, governance) funds allow investors to put their money into funds that align with their personal values. Vanguard's ESG funds track the FTSE4Good US Select Index and hold large- and mid-cap stocks that meet ESG criteria.

The Vanguard FTSE Social Index Fund (VFTNX) is one of Vanguard's premier ESG funds. This fund avoids investing in companies engaged in adult entertainment, alcohol, tobacco, cannabis, gambling, weapons, and nuclear power. It also excludes companies involved with fossil fuels, as well as those that do not meet certain labour, human rights, diversity, and environmental requirements.

VFTNX has delivered the fourth-best average annual return among Vanguard's U.S. large-cap blend funds over the past decade. With a low expense ratio of 0.07%, it is a cost-effective option for investors seeking to align their investments with their values.

In addition to VFTNX, Vanguard offers a range of other ESG funds that focus on different themes and sectors. These funds provide investors with the opportunity to support and promote specific ESG issues that are important to them.

Vanguard's commitment to low fees and expenses makes it a compelling choice for long-term investors, particularly those interested in ESG investing. By investing in Vanguard's ESG funds, individuals can drive change and create a positive impact while also pursuing their financial goals.

Actively managed funds

Vanguard's actively managed funds aim to beat market returns by leveraging the expertise of professional money managers who hand-pick investments. This approach has been successful, with 91% of their actively managed funds outperforming their peer-group averages over the past decade.

• Vanguard Selected Value Fund (VASVX): This fund focuses on mid-cap stocks, specifically those with market caps between $2 billion and $10 billion. It employs fundamental analysis to identify undervalued stocks, trading below their financial metrics, and has delivered impressive near-term returns.
• Vanguard Short-Term Investment-Grade Fund Investor Shares (VFSTX): This fund specializes in short-term and intermediate-term investment-grade fixed-income securities, including Treasury bonds and corporate securities. It has a low expense ratio of 0.20%, making it one of the best actively managed fixed-income funds.
• Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX): VTMFX is a balanced fund with a 50/50 split between stocks and bonds. The bond sleeve consists of municipal bonds, while the stock side includes large-cap stocks like Apple and Microsoft. The fund has generated a 7.8% annual total return since its inception in 1994.
• Vanguard International Growth Fund Investor Shares (VWIGX): This fund offers exposure to both developed and emerging markets stocks of various sizes. It is co-managed by Baillie Gifford and Schroder, two investment management firms with strong track records. VWIGX has outperformed its benchmark over the last decade, making it one of the best international actively managed funds.
• Vanguard PRIMECAP Fund Admiral Shares (VPMAX): VPMAX is one of Vanguard's flagship active mutual funds, generating an impressive 11.2% average annual return since 2001, outperforming the S&P 500 by over 2 percentage points annually. It focuses on GARP stocks, blending growth and value investing styles.

Vanguard's actively managed funds offer investors the opportunity to benefit from the expertise of top money managers and the potential for higher returns. However, it's important to remember that actively managed funds can also underperform, and fees may be higher compared to passive index-tracking funds.

Index funds

Vanguard, a uniquely structured company with no outside owners, offers a range of index mutual funds and ETFs. Their average expense ratio across these funds is 72% lower than the industry average. Vanguard's index funds also provide consistent long-term returns, with 83% of their index mutual funds and ETFs outperforming their peer-group averages over the last 10 years.

• Vanguard Total Bond Market Index Fund (VBTLX)
• Vanguard Total International Bond Index Fund (VTABX)
• Vanguard Total Stock Market Index Fund (VTSAX)
• Vanguard Total International Stock Index Fund (VTIAX)

Vanguard's index funds provide investors with broad diversification, tax efficiency, and low costs. Each index fund contains a preselected collection of hundreds or thousands of stocks, bonds, or a combination of both. This diversification helps to minimize losses, as the strong performance of some stocks or bonds can offset the poor performance of others.

Additionally, index funds tend to change their stock or bond holdings less frequently than actively managed funds, resulting in fewer taxable capital gains distributions and potentially reducing an investor's tax bill.

When considering Vanguard index funds for retirement, it is important to keep in mind that they are not all created equal. It is recommended to evaluate your savings goals, risk tolerance, and investment time horizon to determine the best asset allocation for your needs.

Frequently asked questions