Accumulators (and others) using Target Retirement or other "life-cycle" funds

[Dude]

Hi all,
I'm a 36 yr old electrical engineer, my wife is 37 and stays at home with our two kids. We have amassed a decent amount in our Roth IRAs ($197k) and my 401k ($193k), about $390k total. We have a $140k mortgage (home value about $300k) and own a single-family rental property free and clear (value about $185k).

I'm starting to think about the possibility of retiring early. Our Roth IRAs and 401k are invested in 100% stock mutual funds, mostly Vanguard, 3/4 in index funds and 1/4 in actively managed funds.

I'm thinking about moving some (or all?) of our money to a life-cycle fund. I like the simplicity, low cost, automatic rebalancing and the professional management. I also want to get some exposure to bonds, at least 10%, to dampen volatility a little. Our Roths are at Vanguard so I have access to Target Retirement funds there, my 401k is with Fidelity so I can choose Fidelity Freedom funds If I want. I plan to continue contributing the max to our Roth IRAs (currently $8k) and probably the same amount to my 401k pre-tax. Don't really have much "taxable" investments to speak of (about $5k in a stock investment club).

What I'm having a hard time deciding is which TR fund to pick? If I was to work until the "normal" retirement age of 65 then I should pick Target Retirement 2035 since I will turn 65 in 2035. But say I wanted to shoot for retiring at age 55, should I instead choose Target Retirement 2025?

I guess it goes back to that question posed to those of us working to ER.....are you shooting for a certain date to retire, or are you shooting for a certain dollar amount (e.g. 25x expenses)? If a date, then you should just pick the Target Retirement fund corresponding to that date. But if a sum of $$$ is your goal, maybe it's smarter to stick it in your age 65 TR fund (my case TR 2035) to have more stock exposure for longer and thus have more chance of building up to the desired sum?

Anybody thought through this? What were your considerations when deciding?

Would also like to hear from people like "unclemick" that use TR funds.....what would you do if you were in my shoes (i.e. age 36, $390k to invest, DCA $16k/yr, dreams of ER at say age 55 after I get at least my oldest through college)?

Thanks.

[Dude]

Also, a poster on this forum stated this:

"only thing i dont like about target funds is they tend to become toooo conservative if you dollar cost average in over time. they are best suited for lump sum buy in. the fact that the market rises 2/3 of the time coupled with their constant downward reduction of stock allocations work agsinst you ."

Anybody care to comment? Would it be dumb for me to DCA into a TR fund in my Roths over the next 20 years?

[Animorph]

If I were to move into a target retirement fund I would select a "retirement" date near my 75th birthday or so. These funds are way too conservative for me. But it is easy to adjust either way by selecting your date.

Dan

[just_hatched]

I'm in a similar situation. I'm a 35 yr old software engineer, my wife is 34, no kids yet.
We have about $140k taxable, $160k home equity, and $350k in retirement funds (that includes a
lump sum pension currently valued at $45k.)

If I were to ER, I'd want the 25x expenses as the trigger, which is funded by the money left
over after paying off the house. (we have no rental property).

Our Roth IRAs are much smaller than yours, presumably because we didn't start until 2004.
Our Roth IRAs are $18k each.
Both are invested in Vanguards TR 2045 fund because I'd rather keep a larger stock exposure
for a longer period. I suppose you could also transfer the funds from one TR to another if you
felt it was getting too conservative allocation or otherwise.

I'm still on the "young dreamers" side of the equation like you are, but perhaps others on the
board can provide more insight.

Also - keep in mind that if your wife isn't working, she may not be able to contribute to her Roth.

[Goonie]

I DCA into TRP's Retirement 2020 in my Roth IRA. I chose the 2020 because of the allocations it has. Enough risk, but not too much. I'm very comfortable with it's mix.

The Retirement 2020 is well beyond my actual FIRE date, which is early April of this year, at age 50. I won't be able to contribute anymore to my Roth after this year, since I won't have any earned income after this year. However, I plan on opening another account (taxable) and using a Retirement 2020 fund.

Personally I don't think one should base their choice solely on their intended year of retirement or age, but rather on their tolerance of risk (or lack of tolerance). I'll have a very nice COLA'd pension, so I'm not overly concerned with risk, but I don't want to be psycho and take on too much risk either. The 2020 is 80.25% stocks, and the 2035 (and above) is 92.25% stocks. I'm comfortable with ~80%, I might not sleep so well at 92%. 8)

[ladelfina]

if your wife isn't working, she may not be able to contribute to her Roth.

The working spouse can make a "spousal IRA" contribution to a Roth on the non-working spouse's behalf. At least this was true 3-4 years ago when I was still working.

[martyb]

I'm a federal govt. employee who will retire in 2013 at age 55. I DCA 30% of my income into a 2030 Lifecycle fund of the TSP (Thrift Savings Plan). It's ok for now, but at some point if I feel it's gotten too conservative, I'll switch to the 2040.

[Dude]

Originally Posted by just_hatched

(that includes a
lump sum pension currently valued at $45k.)

Our Roth IRAs are much smaller than yours, presumably because we didn't start until 2004.
Our Roth IRAs are $18k each.

Forgot my pension.....I'm supposed to get a non-COLA'd pension, starting age 65, current accrued benefit ~$11.4k / year.

A few years ago we took a large income tax hit and rolled my wife's 401k (she used to work as an EE also) into a Roth IRA.....it's nice to have 1/2 our stash in Roth and 1/2 in 401k.....I think I need some more taxable though.....

[Dude]

Originally Posted by ladelfina

The working spouse can make a "spousal IRA" contribution to a Roth on the non-working spouse's behalf. At least this was true 3-4 years ago when I was still working.

Yes this is true, I've been putting the max in my Roth and the max in my wife's Roth since she stopped working a few years ago.

[donheff]

I am considering moving to lifestyle funds also (58, two years ERd). I will probably select a 2030 or 2040 because I don't want a very conservative asset allocation. Pick one that feels comfortable now and move to another later if needed to maintain an allocation you are comfortable with.

[. . . Yrs to Go]

I think the one-stop shopping of a Target Retirement funds is great for tax deferred accounts. I wouldn't want them in a taxable account for two reasons. 1) The automatic rebalancing, which is nice during accumulation stage, will actually result in higher taxable gains during the withdrawal phase (one set of gains for rebalancing and another for withdrawals of principal) and 2) the automatic reallocation to bonds may not be in keeping with your desired investment mix (30% stocks when you get to the "income fund"). Problem 2 can be fixed by swapping into a later dated fund, but not without incurring massive capital gains (in a taxable account).

Also, for those with sizeable taxable accounts they should put as much of their income producing assets in tax deferred accounts as possible and leave the more tax-efficient equity funds in their taxable accounts (for which I believe the targeted retirement funds are not well suited).

[. . . Yrs to Go]

Originally Posted by Dude

Also, a poster on this forum stated this:

"only thing i dont like about target funds is they tend to become toooo conservative if you dollar cost average in over time. they are best suited for lump sum buy in. the fact that the market rises 2/3 of the time coupled with their constant downward reduction of stock allocations work agsinst you ."

Anybody care to comment? Would it be dumb for me to DCA into a TR fund in my Roths over the next 20 years?

With all due respect to whoever originally said this, it doesn't make a whole lot of sense to me. While the concept that lump sum investing will generally outperform DCA is accurate, it is also irrelevant to the choice of fund. Most people DCA because that is how their savings accumulate, a little bit over time rather than all at once. It's not clear to me how the choice of a targeted retirement fund impacts this whatsoever.

The point about the investment mix shifting away from stocks is valid, but that is an asset allocation consideration. If you like the asset allocation (and planned adjustments) of the targeted fund, then go for it. As said above, I'd limit these funds to tax-deferred accounts - in which case you can swap into later dated funds at no penalty if your current choice becomes too conservative.

[Sandy]

My DH and I contribute into a target retirement fund through deferred comp. Like Animoph, we selected funds with latter "retirement" dates. The dates doesn't reflect when you wish to retire, but rather the rate/years in which the fund will move from more aggressive to more conservative investments. So, you need to select a date that will ensure adequate growth even if you FIRE in your 40's or 50's.

[Dude]

Maybe I'm over-complicating this (the engineer in me).....sounds like the most important questions are:

1) At what age do I want to ER?
2) What do I want my asset allocation to be at that age?

If I want to ER at age 55 (approx 20 yrs from now) and have a 60% stock/40% bond allocation at that time, I should go with the TR 2030 fund (currently 90% stock/10% bond). If I want to be a little more agressive and shoot for a 70% stock/30% bond allocation at ER age of 55, I should go with TR 2035 (also currently 90% stock/10% bond).

Once that's settled then I just need to figure out how much I need to contribute each year to meet 25x expenses goal at age 55, ideally using a retirement forecaster such as Financial Engines.

Sound like a good plan?

[Goonie]

Originally Posted by Dude

Sound like a good plan?

It does to me. 8)

[maddythebeagle]

For folks with deferred comp. plans...what kind of expense ratios are quoted for your life cycle funds....I have listed on our d. comp site that the expense ratios are lower than the other index funds....?

[Dude]

Dumb question but by "deferred comp" do you mean like a 401(k)?

[maddythebeagle]

I am thinking of a 457 program (which is like a 401k but can take money out at separation of service...maybe I should have been more specific since I think some other programs are called deferred comp.....