Vanguard changed retirement saving and investing as we know it. Under its visionary founder Jack Bogle, Vanguard created the concept of the low-cost index fund.
And the company continues that legacy today via its ever expanding suite of Vanguard mutual funds.
The best Vanguard retirement funds are almost always competitive on price, and they are all popular choices in American 401(k) and IRA plans. Today, I’ll introduce you to five of these retirement-focused mutual funds (and where applicable, their ETF counterparts).
Disclaimer: This article does not constitute individualized investment advice. These securities appear for your consideration and not as personalized investment recommendations. Act at your own discretion.
What Should You Want in a Retirement Fund?
When investing your retirement savings, you need to consider a few critical factors.
To start, a robust retirement portfolio should provide diversification across various asset classes, such as stock funds, bond funds, and possibly real estate or commodity mutual funds. Diversifying your retirement portfolio across these asset classes helps spread risk and smooth your returns.
Costs matter too, which is why Vanguard mutual funds are often mainstays in retirement portfolios. Every dollar spent on fees and expenses is a dollar no longer available to grow and compound over time, so keeping expenses cut to the bone is vital. Good news there: The best Vanguard retirement funds will generally have some of the lowest fees and expenses in the business.
And finally, you ideally want your retirement portfolio to produce regular dividend income. Stocks can regularly experience nasty corrections and bear markets, but a good income fund can provide for your living expenses without forcing you to sell at an inopportune time.
Why Vanguard Mutual Funds?
Vanguard Group is a leader in index mutual funds. Vanguard founder Jack Bogle launched the first Vanguard index fund for U.S. retail investors—the Vanguard First Index Investment Trust, which is now the Vanguard 500 Index Fund Admiral Shares (VFIAX)—in 1976, and in the four-and-a-half decades that have followed, Vanguard Funds have grown to become the dominant force in index investing.
Today, this former upstart mutual fund company has more than $8.0 trillion in assets under management with an average expense ratio of just 0.08%, or a mere 80¢ for every $1,000 invested. There are currently over 420 Vanguard funds, including mutual funds and Vanguard ETFs.
And Vanguard index funds cover every conceivable pocket of the investable universe, including individual sector funds and emerging markets.
Vanguard grew into the powerhouse mutual fund company it is today by taking care of its clients and genuinely looking after their interests. Vanguard funds really started and continue to accelerate the trend of fee compression. But it’s not only the best Vanguard retirement funds that benefit. We all collectively pay less in fees and expenses and enjoy better returns because of the index revolution started and led by Vanguard’s founder Jack Bogle.
Related: The 24 Best ETFs to Buy for a Prosperous 2024
The Best Vanguard Retirement Funds for 2024
With all that out of the way, let’s dig into some of the best Vanguard retirement funds to consider diving into this year.
Best Vanguard Retirement Fund #1: Vanguard 500 Index Fund Admiral Shares
- Style: U.S. large-cap stock
- Assets under management: $524.9 billion
- Expense ratio: 0.04%, or 40¢ per year for every $1,000 invested
- Dividend yield: 1.3%
- Minimum initial investment: $3,000
For a solid, long-term growth investment, it’s hard to beat a low-cost S&P 500 index fund.
In fact, virtually no one does, or at least not consistently. The vast majority of fund managers who run large-cap funds (funds that invest in larger companies) struggle to consistently beat the S&P 500 Index, particularly after fees. In the first half of 2023, 60% of active managers underperformed the S&P 500, according S&P Dow Jones Indices. A majority of active managers have failed to beat the S&P 500 in 20 out of the past 23 years.
So if you can’t beat it, join it.
The Vanguard 500 Index Fund Admiral Shares (VFIAX) boasts well more than $520 billion in assets under management, and that’s just in the VFIAX share class. Across all of the mutual fund’s share classes, this fund manages more than $1.2 trillion! That scale is why VFIAX can offer a skinflint expense ratio of just 0.04%—that’s not free, but it’s awfully close.
The S&P 500 is a collection of the largest and most dominant American companies. To be selected for this stock market index, a company must have a market capitalization of at least $18.0 billion, its shares must be highly liquid (shares are frequently bought and sold), at least 50% of its outstanding shares must be available for public trading, it must have positive earnings in the most recent quarter, and the sum of its previous four quarters must be positive. Once a company is in the index, it doesn’t necessarily get kicked out if it fails to meet all of the criteria at some point in the future, but the selection committee would take that under consideration.
Turnover (how much the fund tends to buy and sell holdings) tends to be low, as only a handful of stocks enter or leave the index in any given year. This makes VFIAX an extremely tax-efficient option for taxable accounts. This may be Vanguard’s oldest index strategy, but it remains one of the very best Vanguard retirement funds.
If the $3,000 minimum is a problem, the exact same strategy is available via the Vanguard S&P 500 ETF (VOO), which charges an even cheaper 0.03% in annual expenses. At time of writing, a single share can be purchased for around $480.
Want to learn more about VFIAX? Check out the Vanguard provider site.
Related: 10 Best Index Funds to Buy
Best Vanguard Retirement Fund #2: Vanguard Total Bond Market Index Fund Admiral Shares
- Style: U.S. intermediate core bond
- Assets under management: $97.9 billion
- Expense ratio: 0.05%, or 50¢ per year for every $1,000 invested
- SEC yield: 4.3%*
- Minimum initial investment: $3,000
No retirement asset allocation is complete without bond funds. As an asset class, bond funds play an important role in lowering volatility and providing regular income.
And within the world of Vanguard bond funds, the Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) stands out as one of the very best Vanguard retirement funds for its combination of competitive yield and rock-bottom fees and expenses. VBTLX is large, with $97.9 billion in the Admiral share class in quality bond assets spread across all of its share classes. And with an expense ratio of just 0.05%, it’s all but free to own.
The Vanguard Total Bond Market Index Fund provides broad exposure to the universe of bonds. Approximately 46% of its portfolio is Treasury or agency debt backed by the U.S. government, and another 20% is invested in government mortgage-backed securities (MBSes). Industrial-sector corporate bonds make up a little over 15%, banks and financial institutions make up 9%, and the rest is spread across foreign bonds, utilities, and commercial mortgage backed securities (CMBSes).
One of the most critical metrics to consider when considering bond funds is duration, which is a measure of interest-rate sensitivity. As an example, a bond with a duration of two years would see its price rise by 2% if interest rates fell by 1% (or conversely, would see its price fall by 2% if interest rates rose by 1%). The actual calculation of duration is fairly complex; it’s the weighted average of the bond’s cash flows. But the key takeaway is that, all else equal, the longer a bond’s time to maturity, the higher its duration—and thus the higher the interest-rate risk.
The Vanguard Total Bond Market Index Fund, with a duration of 6.3 years, has a medium-term duration with only moderate interest-rate risk. So, apart from the 4%-plus yields, investors could enjoy respectable capital gains if market interest rates decline in the coming years in response to falling inflation.
If the $3,000 minimum is a problem, the exact same strategy is available via the Vanguard Total Bond Market ETF (BND), which charges an even cheaper 0.03% in annual expenses. At time of writing, a single share can be purchased for around $74.
* SEC yield reflects the interest earned across the most recent 30-day period. This is a standard measure for funds holding bonds and preferred stocks.
Want to learn more about VBTLX? Check out the Vanguard provider site.
Related: 10 Best Fidelity Funds to Buy
Best Vanguard Retirement Fund #3: Vanguard Federal Money Market Fund
- Style: Money market
- Assets under management: $307.0 billion
- Expense ratio: 0.11%, or $1.10 per year for every $1,000 invested
- SEC yield: 5.3%
- Minimum initial investment: $3,000
Of course, interest rates can also go higher, in which case higher-duration bond funds can experience capital losses. That was certainly the case in 2022, when very long-term bonds actually saw greater losses than common stock indexes like the S&P 500.
If you are looking for a competitive yield with essentially no duration or interest rate risk at all, the Vanguard Federal Money Market Fund (VMFXX) is a solid option and one of the very best Vanguard retirement funds at today’s prices. This income fund consists entirely of U.S. Treasury bills and other U.S. government obligations and repurchase agreements. This is an extremely conservative option with extremely limited possibility of loss.
Money market funds are very sensitive to Federal Reserve policy moves. It was barely two years ago that money market funds in general offered virtually nothing in yield. But after the most aggressive string of rate hikes in history, VMFXX is a legitimate income fund with a yield above 5%.
If, as is widely expected, the Fed starts lowering rates in 2024, VMFXX will see its own yield fall as its existing portfolio matures and is replaced with newer lower-yielding investments. If and when that day comes, you might want to re-evaluate your options. But until then, the Vanguard Federal Money Market Fund remains one of the very best Vanguard retirement funds for its low risk and competitive yield.
Want to learn more about VMFXX? Check out the Vanguard provider site.
Related: 13 Best Mutual Funds to Buy
Best Vanguard Retirement Fund #4: Vanguard Dividend Appreciation Index Fund Admiral Shares
- Style: U.S. dividend stock
- Assets under management: $14.8 billion
- Expense ratio: 0.08%, or 80¢ per year for every $1,000 invested
- Dividend yield: 1.8%
- Minimum initial investment: $3,000
The first thing to note about the Vanguard Dividend Appreciation Index Fund Admiral Shares (VDADX) is that, despite its name, it’s not an income-first fund. With a yield of just 1.8%, the dividend income is a little better than the S&P 500, but it’s still almost an afterthought.
That said, VDADX is one of the very best Vanguard retirement funds precisely because income takes a back seat.
The fund tracks the performance of the S&P U.S. Dividend Growers Index, which is made up of U.S. companies that have increased their dividend payout every year for at least 10 consecutive years. As an additional filter, the index excludes the top 25% highest-yielding eligible companies from the index, as exceptionally high-yielding stocks are often at risk for dividend cuts.
There is no better sign of company health than a long history of rising dividends. As the old Wall Street maxim goes: The safest dividend is the one that was just raised. Company boards only raise the dividend when they are confident they will have the cash to back it up.
As a general rule, you want diversified funds in a retirement portfolio, and VDADX certainly fits that bill. Technology, financials and health care are its three largest sector allocations at 23%, 19%, and 15%, respectively.
If the $3,000 minimum is a stretch on your budget, the same strategy is available via the Vanguard Dividend Appreciation ETF (VIG), which charges 0.06% in annual expenses and trades for around $183 per share.
Want to learn more about VDADX? Check out the Vanguard provider site.
Related: 10 Best Vanguard Funds to Buy for the Everyday Investor
Best Vanguard Retirement Fund #5: Vanguard Target Retirement Funds
- Style: Target-date
- Expense ratio: 0.08%, or 80¢ per year for every $1,000 invested
- Minimum initial investment: $1,000
One of the challenges in retirement planning is getting the asset allocation right, or having an asset class mix that is appropriate for an investor at your age and stage of life. An ideal portfolio for a 20-year-old is likely going to be very different from that of a 40-year-old, and both those portfolios will be different from what’s ideal for a 60-year-old.
This is where Vanguard target retirement funds can really add value. Target-date funds—also called life-cycle funds—are a type of mutual fund that are designed to change their asset allocation over time. Target-date funds start out invested heavily in stocks, then slowly reduce their stock exposure and replace it with bond exposure as they approach their target retirement date, following a glide path.
The target retirement dates are intended to be estimates; they don’t have to be super precise. Generally, most mutual fund families will create target-date funds in five-year increments (say, 2025, 2030, 2035, etc.).
Vanguard is a strong player in this space, and the Vanguard Target Retirement Funds tend to be very competitive on price. The funds themselves typically hold both U.S. and international stocks of various sizes, as well as U.S. and international bonds.
Want to learn more about Vanguard Target Retirement Funds? Check out the Vanguard provider site.
Related: 10 Best Vanguard Index Funds to Buy
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Related: Best Vanguard Retirement Funds to Hold in an IRA
Vanguard Funds for Retirement: Frequently Asked Questions (FAQs)
What is the minimum investment amount on Vanguard mutual funds?
Vanguard funds are known for being shareholder-friendly. The Vanguard mutual fund company blazed new trails with the index fund, and Vanguard has done more than any other investment firm to keep costs to a minimum for investors.
But there is one hitch. Many of Vanguard’s cheapest funds in terms of fees have initial investment minimums of around $3,000.
If that is a problem for you, don’t sweat it. Most popular Vanguard index funds are also available as ETFs. Most brokers will allow you to buy as little as one share, and some even allow for fractional shares. And if you use a commission-free brokerage, you can buy those ETFs without incurring additional fees. ETF prices vary, of course, but many cost less than $100, and they rarely exceed $400 per share.
Related: Best Vanguard Retirement Funds to Hold in a 401(k)
Why does a fund’s expense ratio matter so much?
Every dollar you pay in expenses is a dollar that comes directly out of your returns. So, it is absolutely in your best interests to keep your expense ratios to an absolute minimum.
The expense ratio is the percentage of your investment lost each year to management fees, trading expenses and other fund expenses. Because index funds are passively managed and don’t have large staffs of portfolio managers and analysts to pay, they tend to have some of the lowest expense ratios of all mutual funds.
This matters because every dollar not lost to expenses is a dollar that is available to grow and compound. And over an investing lifetime, even a half a percent can have a huge impact. If you invest just $1,000 in a fund generating 5% per year after fees, over a 30-year horizon, it will grow to $4,116. However, if you invested $1,000 in the same fund, but it had an additional 50 basis points in fees (so it only generated 4.5% per year in returns), it would grow to only $3,584 over the same period.
