Target-date mutual funds allow individuals set aside money for retirement at a reasonable cost. Target-date funds (TDFs) that are over 25 years away from their target dates would start with aggressive asset allocation by investing about 90% of their assets in domestic and international stocks, while the remaining 10% would be allocated to domestic and international bonds. As a fund hits the 25-year mark before its target date, it gradually and smoothly adjusts asset allocation in favor of more conservative assets, such as sovereign and corporate bonds offered by domestic and foreign issuers. As a fund approaches its target date, its assets consist of over 50% of fixed income securities.

T. Rowe Price Retirement 2045 Fund

The T. Rowe Price Retirement 2045 Fund has been one of the best performers among all TDFs from 2005 to 2015. It has generated an average annual return of 7.17% and a standard deviation of 15.62%, resulting in a Sharpe ratio of 0.44. Compared to other funds, the T. Rowe Price Retirement 2045 Fund has a more aggressive allocation to stocks even on its adjustment path when compared to similar TDFs. This has allowed the fund to generate better returns, as the U.S. equity market revived from 2009 to 2015. Because the fund is very far from its target date, it allocates most of its assets to risky securities. As of November 2015, about 55% of its assets are allocated to domestic stocks, while 31% is allocated to foreign equities. Bonds account for about 10% of the fund's portfolio, while the remainder sits in cash.

The T. Rowe Price Retirement 2045 Fund comes with no load fees and has an expense ratio of 0.75%, which is much higher compared to target-date funds. As of November 2015, the fund has earned a five-star rating from Morningstar over the last three and five years and a four-star rating over the last 10 years.

Schwab Target 2040 Fund

The Schwab Target 2040 Fund invests in a combination of other Schwab funds and Laudus funds. The fund's planned asset allocation at its target date is 40% equity, 54% fixed income securities and 6% cash, including money market accounts. The fund has demonstrated one of the best returns from 2005 to 2015, with an annual average return of 7.03% at a standard deviation of 13.81%, resulting in a Sharpe ratio of 0.47. As of November 2015, the fund allocated 58% to domestic stocks, 26.6% to foreign stocks and about 10% to bonds. From 2013 to 2015, the fund has undergone significant management and asset allocation changes, which may make its past performance a poor predictor of future returns.

The fund has an expense ratio of 0.78% and comes with no load fees. The Schwab Target 2040 Fund has earned a five-star rating from Morningstar over the last three-, five- and 10-year periods as of November 2015.

Vanguard Target Retirement 2045 Fund

The Vanguard Target Retirement 2045 Fund is one of the cheapest TDFs in the fund market with a hard-to-beat expense ratio of 0.18% and no load fees. From 2005 to 2015, the fund was among the top performers by generating an average annual return of 6.61% and a standard deviation of 14.45%, resulting in a Sharpe ratio of 0.43. Vanguard management announced that it plans to increase its mutual funds' exposure to international stocks and bonds by 2015. As of November 2015, the fund allocates 35% to foreign stocks and 53% to domestic stocks, while bonds have about 10% allocation.

Compared to other funds, the Vanguard Target Retirement 2045 Fund will allocate more funds to risky assets, but after retirement it will have much more conservative allocations when compared to other TDFs. As of November 2015, the fund earned a four-star rating from Morningstar over the last three and five years, and a three-star rating over the last 10 years.

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.