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The World's Easiest Retirement Plan

One day, your money will be working for you, instead of you working for it. Yes, that's right: retirement. And when that day comes, your savings will need to cover your total costs of living, pace inflation, and take care of any surviving dependents if you die prematurely.

That much is obvious. Beyond that things get fuzzy. How much will you need? How should it be allocated? What financial vehicles are best? The questions go on and on.

A little information is dangerous
It's easy to drown in the torrent of information and opinions. In fact, it's tempting to just give up and trust in fate. After all, retirement is years away!

But giving up is just about the worst thing you can do, because doing anything -- anything at all! -- to prepare for retirement will pay off. And no matter what the "best" plan is, a simple strategy that moves you toward retirement security beats any strategy that's too complex for you to follow.

Here's the simplest retirement plan I know:

Step 1: Write down your age.
Step 2: Every payday, put whatever you can into the Vanguard Target Retirement Fund that matches your age.
Step 3: When 4% of your account balance equals or exceeds your annual expenses, retire.

If you know how old you are, you've already completed Step 1. See how easy that is?

Sure, this plan ignores IRAs, 401(k)s, 403(b)s, TSPs, employer matches, asset allocation, tax effects, and the time value of money.

Those things matter if you're trying to build the perfect retirement plan. None of them matter, though, if they're so cumbersome you're considering doing nothing at all.

What you get for your money
When you make that one-stop shop the home for your retirement cash, you get a low-cost mutual fund that:

  • Invests in other low-cost index and index-like funds
  • Diversifies across various asset classes
  • Automatically becomes more financially conservative as you age
  • Always keeps some money in the ultimate retirement safety net.

Here's how it works: The target funds invest in other low-cost Vanguard funds, shifting their allocations over time to model appropriate diversification. What start out as fairly aggressive, stock-heavy allocations while you're in your 20s gradually morph into conservative and bond-heavy allocations the closer you get to retirement.

If you buy a target fund, here's what you get in proportions appropriate to your age:

Fund Held by the Target Retirement Funds

Sample Holdings

Total Market Index Fund (VTSMX)

General Electric (NYSE: GE  ) , Microsoft (Nasdaq: MSFT  )

European Stock Index Fund (VEURX)

BP (NYSE: BP  ) , Nokia (NYSE: NOK  )

Pacific Stock Index Fund (VPACX)

Toyota (NYSE: TM  ) , Mitsubishi UFJ Financial (NYSE: MTU  )

Emerging Markets Stock Index Fund (VEIEX)

China Mobile (NYSE: CHL  )

Total Bond Market Index Fund (VBMFX)

AAA Bonds (79.8% of the fund)

Inflation-Protected Securities Fund (VIPSX)

Treasury Inflation-Protected Securities

Prime Money Market Fund (VMMXX)

Ultra-short-term debt

Is that all there is to it?
Making the commitment to invest for your retirement and following through with that commitment are the two most critical parts of any retirement plan. Once you've mastered those hurdles, you can move on to figuring out how to do it more efficiently. Done right, retirement planning can take years of time and thousands of dollars off the amount you need to invest to reach a successful retirement.

This simple retirement plan may be all you're ready for. But if you'd like to see what else you could do to ensure a comfortable retirement, my colleague Robert Brokamp and his team at Motley Fool Rule Your Retirement can help.

Thanks to the world-class collection of tools, guides, and experienced people available in his service, you'll be able to design your perfect retirement plan. If you'd like to see what you'd be investing in, join us for a 30-day free trial.

At the time of publication, Fool contributor Chuck Saletta owned shares of General Electric and Microsoft. Microsoft is a Motley Fool Inside Value selection. The Fool has a disclosure policy.


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Chuck Saletta
TMFBigFrog

Chuck Saletta has been a regular Fool contributor since 2004. His investing style has been inspired by Benjamin Graham's Value Investing strategy. Chuck also can be found on the "Inside Value" discussion boards as a Home Fool.

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