So, what are you supposed to do if you want to save an extra $20,000 a year towards your retirement and you’ve already maximized the contributions to your 401(k) and Roth? (Should you even contribute more if you’ve maxed out your 401k and IRA?) Well, if you read Walter Updegrave’s retirement columns recently, you would’ve seen that exact question answered by CNN Money’s resident retirement guru. His advice is to put it in a mutual fund and he outlines three ways aptly titled The Easy Way, The Easier Way, and The Easiest Way.
The Easy Way – Tax-Managed Mutual Funds
The easy way involves picking a tax-managed mutual fund where the administrator works to minimize taxable distributions. With your typical actively managed fund, the manager will buy and sell securities to gain a solid return and as a result will create realized gains, which you then must take as distributions and pay taxes on. A tax-managed mutual fund manager will take great pains to minimize realized gains. Walter recommends T. Rowe Price and Vanguard as two places to begin your search.
The Easier Way – Index Funds
If you’ve read much in the investing world you’re probably familiar with index funds – mutual funds that match the holdings of a particular index. Since they match an index, they usually won’t have a real manager, and so you really compete on the basis of price – or the expenses. The “hard” part of index fund investing is picking the right mix of indicies so you aren’t overexposed to a particular market, so take great care in selecting your allocations.
The Easiest Way – Target-Date Retirement Funds
If you don’t like deciding for yourself what kind of mix to buy, have the “experts” do it for you. Not all target date retirement funds are created equal so be sure to do your homework and ensure that their mix is something that you want. This is the “easiest way” because once you pick one that is the right mix, they will adjust it according to risk profiles for your target date (and assuming your age and risk tolerance). The closer you are to the date, the more conservative the fund will be. The only knock against these types of funds is that they aren’t as tax efficient as the other two but you do get the convenience of not needing to rebalance your portfolio every year.