7 Tips for Finding the Best Target-Date Retirement Funds to Buy

How to find the best target-date retirement funds.

One in three Americans have nothing -- zilch -- saved for retirement. That's not OK. If you're financially able, you need to start saving, today. A retirement nest egg is vital for a full, happy, and healthy life. Once you start saving, choosing where to invest your money is another hassle. Thankfully, retirement funds have made this much easier for investors, and target-date retirement funds, which adjust their holdings as you age to suit your changing risk profile, are even easier. Contrary to public perception, figuring out how to invest responsibly isn't rocket science. Here are seven tips to finding the best target-date retirement funds for you.

Figure out your timeline.

This is generally the easiest and most crucial variable to consider when narrowing down what kind of target-date funds will work for you. Most target-date funds contain a year in their name, which corresponds to the year you expect to retire. If you're 45 and expect to retire at 65, pick a target-date fund roughly 20 years out. They're often organized into five-year increments, so in this case you might consider a 2035 or 2040 target-date retirement fund. There are also target-date funds designed for those currently in retirement.

Figure out your risk tolerance.

Remember, target-date funds are designed to be full portfolios, so if you have other investments, consider how those might affect the total risk you're taking. For example, if you already have a good chunk of money in the stock market, you might want to lean more conservative than you otherwise would, choosing funds with less equity exposure, or funds that move to lower-risk investments more quickly than others. Once you have an idea for your risk tolerance, how do you find a fund with the same discipline? That's up next.

Know the glide path.

The process by which target-date funds gradually de-risk their holdings is called the "glide path." Knowing the difference between "to" or "through" target-date funds is crucial: "To" funds reach their most conservative allocations at the specified date. "Through" target-date funds don't reach that point until sometime after retirement, giving you some marginal growth opportunities even when you're done working. These details will be noted in a fund's prospectus. Reading a prospectus doesn't sound like much fun, but knowing the glide path is arguably the most arcane part of finding the best target-date funds to buy. The next variable is much easier to spot.

Avoid fees.

The best target-date funds have low fees, it's as simple as that. If you're looking at funds with expense ratios above 0.5 percent annually, strike them from your list. The one constant with funds of any kind -- mutual funds, exchange traded funds, hedge funds and retirement funds alike -- is that higher expenses are rarely justified. High fees destroy long-term performance, and there is zero evidence to show that managers charging higher fees earn them with outperformance to begin with. Vanguard has the same philosophy, and an incredible amount of assets under management, routinely making it one of the lowest-cost fund families.

Erring toward aggression might be prudent.

The biggest risk in the mind of most investors is a market meltdown. What if the stock market crashes right before you retire? Unfortunately, that's an unavoidable risk. But it's not the risk investors searching for the top target-date funds should worry about most. Inflation and longevity risk are the two biggies that Americans underweight in their retirement investing decisions. Longevity in particular: people are living longer than ever, and there's a real chance you outlive your money if you're too conservative. So consider buying a "through" fund, or if you insist on a "to" fund, one that's five years further out than you expect.

Use a fund screener.

Once you know the basic characteristics of your dream fund, how do you actually find the best target-date funds for you? Using a fund screener, you can input some of your preferences and come away with a list of funds that fit your criteria. The U.S. News & World Report fund screener contains a universe of mutual funds and ETFs, allowing users to sort by things like asset allocation levels, fund families, expenses and returns. U.S. News also ranks the mutual funds in each category, providing additional insight that can help investors choose the best fund for them. Most major fund families have screeners of their own as well.

Know the limitations.

Target-date funds can be great investing instruments for investors who just want to make hassle-free retirement contributions without constantly losing sleep over decisions. However, target-date funds aren't flawless. Even well-diversified target-date funds still aren't totally without risk, and don't technically guarantee an income stream in retirement. They're not known for tax efficiency either, since bond income is taxed at high rates and tax-loss-harvesting isn't typically a main priority. For that reason, you'll often want to hold these in tax-efficient accounts. Finally, you'll want to check in on your fund occasionally throughout the course of its lifetime to make sure it's following the "glide path" you signed up for.

John Divine is an investing reporter for U.S. News & World Report, where he covers financial markets and the economy, with a focus on individual stock analysis. He has been an investor himself for over 10 years, and has been writing professionally about stocks and investing for the last five years. He previously wrote about the stock market for The Motley Fool and InvestorPlace, and his work has appeared on Yahoo! Finance, MSN Money, and AOL DailyFinance. He graduated from Appalachian State University in 2011 with a bachelor's degree in finance and banking. At Appalachian, he was a member of the Bowden Investment Group, a team of students that ran a real-money portfolio worth over $100,000. You can follow him on Twitter or give him the Tip of the Century at jdivine@usnews.com.