The Best Index Funds for Retirement Investing

It feels a little funny talking about retirement at the ripe old age of 36, but if there’s anything I’ve learned in life is that you can never start planning for your future too early.

I started work for a merchant processor in June of 1999. For those of you who don’t know what those are, merchant processors are the men behind the curtain, so to speak, that allow your credit and/or debit card to be accepted at millions of locations worldwide. Okay, okay. I know that sounded a little too much like the last VISA commercial you heard, but hey, that’s how I roll. Anyway, along with this great job, I got access to my very first 401(k) account. But, at the time, retirement was the last thing on my mind back then. I mean, I had a baby to feed and a mortgage to pay. I needed every single penny I earned to be deposited into my checking account at payday.

But then, thanks to a really great manager and friend who will remain nameless, I realized that I needed to start planning for my future and the future of my child and start actually making contributions to my 401(k). By not contributing, I was leaving money on the table (my employer makes a generous company match every year) and my contributions reduced my tax burden, meaning that even though I was sending $40 to my 401(k), there was only a $35 actual deduction on my paycheck each week. How cool is that?

Best Index FundsSo, the reason that I bring all of this up is not so much to encourage you to contribute to your 401(k) or other retirement accounts (you should!), but to tell you a little bit about why you should invest those dollars in index funds. In my case, my employer allows me to invest in a number of funds, some a little bit more aggressive than others. In the early days, I simply overlooked many of these options in favor of investing in company stock, but thank goodness someone pointed out the error of my ways and pointed me toward index funds. Here’s what I discovered:

Index funds are not actively managed by a fund manager. What does that mean? It means that index funds don’t buy and sell investments often. Since there are fewer turnovers, there is no need for a commission hungry (and sometimes foolhardy) fund manager to eat away at your gains, making them an inexpensive choice for investing.

Index funds are designed for long term investment. Retirement investors are the hands off type of investors. They like to ride out the ups and downs of the economy and know that they will come out on top on the other side. Index funds provide the type of no-work investment strategy that most of us novice investors crave. The added bonus is that there is very little in the way of taxation on gains, so, once again, more money stays in your pocket.

Ready to start investing in index funds yet? Well, according to Money Magazine, here are a few good funds to start with:

Large Cap

  • Fidelity Spartan 500 Index Investor
  • Fidelity Spartan Total Market Index Investor
  • Vanguard 500 Index Investor
  • Vanguard Total Stock Market Index

Mid Cap

  • Vanguard Mid Capitalization Index

Small Cap

  • Vanguard Small Cap Index


  • Vanguard REIT Index


  • Fidelity Spartan International Index Inv
  • Vanguard Emerging Mkts Stock Idx
  • Vanguard Total Intl Stock Index


  • Vanguard Short-Term Bond Index
  • Vanguard Total Bond Market Index

Money Magazine ranks all of their fund choices based on key predictive values such as low cost, placing shareholders’ interests first and a consistent investment strategy; however since index funds are really only a reflection of the index markets, the only key predictive indicator here is price.

But, keep in mind that these are just suggestions. While these may be great index funds for Money Magazine’s investors, they may not be the right fit for you. Also, if your retirement account does not allow you to invest in index funds, think about opening a Roth IRA. Roth IRAs allow you to determine where your money is invested, not your company’s benefits administrator. Of course, the contributions you make won’t be tax deferred going in, but you generally won’t pay taxes on the money when it comes back out.

It is always a good idea to talk to a certified financial planner when thinking about your retirement strategy. I personally suggest talking to more than one. You wouldn’t undergo major surgery without a second opinion, right? So get one for your retirement portfolio, too.

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  1. Hi, i enjoyed what i read abt the Index Fund. My worry is not having enough for my retirement,i leave in SA, Which Fund i should look at or should i invest outside SA. Please advise…

  2. Same here. I use them in my Roth. Very efficient for the long-haul.

  3. Adam Williams says:

    Great list. I’m a big fan of Vanguard’s index funds.