index funds - silly question
- Thread starter badatmath
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I take it you are referring to target retirement date funds, which are typically "balanced funds", containing both stocks and bonds. They are generally designed to shift from stocks to bonds as the target date approaches, and the principal difference between the various target date funds available at any one time is the relative share of stocks and bonds in them. Thus, a Vanguard Target Retirement 2025 fund will have about 65% stocks and 35% bonds, while a Vanguard Target Retirement 2045 fund will have about 90% stocks and 10% bonds. You simply pick the date that has the asset mix you want. Just remember that it will gradually shift to bonds over time.
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As Gumby said, you can pick any one that you want. Should you? Well it seems counter intuitive to me. You're putting your trust in an asset manager but you're not taking their advice on the asset allocation that is appropriate for your retirement situation. One shift that might make sense to me is to pick a date that considers your actual retirement and adjust that for your age. On this board, obviously, your age at retirement may be younger than what is anticipated by the asset manager that expects you to retire at something like 65.
I suspect most on the board are sophisticated enough to control their own asset mix by combining stock and bond funds.
However, I think many (even most) in the work place probably benefit from a Target Date fund, since rebalancing is automatic and avoids common problems like inappropriate fund selection, asset allocation, return chasing, and not rebalancing.
My eldest DS is in a Fidelity Target fund and quite content; I told him he might consider adding international and small caps when the totals start to mount up to something more significant. He's ahead of me at his age.
A 2045 fund might be a little too stock weighted for most retiring in 2025, however.
However, I think many (even most) in the work place probably benefit from a Target Date fund, since rebalancing is automatic and avoids common problems like inappropriate fund selection, asset allocation, return chasing, and not rebalancing.
My eldest DS is in a Fidelity Target fund and quite content; I told him he might consider adding international and small caps when the totals start to mount up to something more significant. He's ahead of me at his age.
A 2045 fund might be a little too stock weighted for most retiring in 2025, however.
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Hmm guess I had the wrong words after all. I did not buy any of the target funds when employer offered them in 401k because of the expenses so never gave it a second thought until today. Coworker had just been to a financial planner of some sort and was spouting off words of "wisdom" they heard. But to call it 2045 is kind of weird why not call it 90/10 or whatever. I like things to say what they mean!
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Vanguard's 2025 fund has a fee of only .14%--but few probably have access through employer's 401k. Fidelity 2025 is not bad at .66%--the cost goes up, though, the further out you go.
I don't use them, but I think the Vanguard options are pretty attractive for a one pick fund. I use the Vanguard 2025 as a benchmark, since the allocation are pretty close to mine.
I don't use them, but I think the Vanguard options are pretty attractive for a one pick fund. I use the Vanguard 2025 as a benchmark, since the allocation are pretty close to mine.
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
It sounds like your question is about asset allocation... in theory all else being equal someone retiring in 2045 would invest less conservatively than someone retiring in 2025. You can see this by looking at the AA of Vanguard target date retirement funds. For those retiring in 5 years, Vanguard target date funds are typically ~60/40 but for those retiring in 20 years it is more like 80/20.
But AA is very personal.... I have typically had higher equity allocations than shown below because I am very comfortable with the stock market having en an investor for over 35 years, we have other sources of retirement income and have a lot of flexibility in our spending to tighten our belts if needed during a downturn.
But AA is very personal.... I have typically had higher equity allocations than shown below because I am very comfortable with the stock market having en an investor for over 35 years, we have other sources of retirement income and have a lot of flexibility in our spending to tighten our belts if needed during a downturn.
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LOL!
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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One should not pick a Target Date fund by the Year in the fund name. One should pick the Target Date fund by the asset allocation it has. Just pick the TD fund with the asset allocation that you want.*
If you like more equities than usual, then there is nothing wrong with picking a 2045 fund if you plan to retire in 2023.
I was a 401(k) fiduciary and saw anonymized aggregate analysis of what employees did with their 401(k) selections. Quite a lot of people simply switched to the fund(s) with best performance in the previous 1 or 3 years. They gave no thought to balancing risk by picking an asset allocation with some percentage in equities and some other percentage in bonds.
*That can be the hard part: What asset allocation do you want and why?
If you like more equities than usual, then there is nothing wrong with picking a 2045 fund if you plan to retire in 2023.
I was a 401(k) fiduciary and saw anonymized aggregate analysis of what employees did with their 401(k) selections. Quite a lot of people simply switched to the fund(s) with best performance in the previous 1 or 3 years. They gave no thought to balancing risk by picking an asset allocation with some percentage in equities and some other percentage in bonds.
*That can be the hard part: What asset allocation do you want and why?
LOL!
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Fidelity has at least 3 varieities of the Freedom funds. The Freedom Index funds do not have actively-managed funds in them, but instead hold passively-managed low-expense-ratio index funds. The expense ratios of the Freedom Index funds are around 0.15%. Fidelity hides them pretty well on their web site, so many Fidelity clients don't know about them.
For my 21 year old son, I help him to contribute into his Roth IRA using Vanguard Target Requirement 2055 fund. After each summer, depending on his earnings, I put up to $5,500 for him. I told him not to touch this until 2055 when he is 58, hopefully near his retirement age.
In Vanguard, you can pull up a long list of funds with names like,
...2040
...2045
...2050
...2055
etc
So, I believe this is better than naming these
....80/20
....85/15
....90/10
etc
For 2045 fund, I would suggest that fund to a 30 year old person and not touch until he is 58 at least. YMMV.
In Vanguard, you can pull up a long list of funds with names like,
...2040
...2045
...2050
...2055
etc
So, I believe this is better than naming these
....80/20
....85/15
....90/10
etc
For 2045 fund, I would suggest that fund to a 30 year old person and not touch until he is 58 at least. YMMV.
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
May not apply to him, but if his income exceeds his deductions and exclusions and he is paying taxes then he may qualify for the retirement savers tax credit. They get a credit of up to 50% of what they save for retirement in a tIRA or a Roth. For DS, we do a tIRA contribution to lower his income enough to qualify for the maximum 50% benefit and then do a Roth contribution as necessary to get the credit to be equal to his tax. The last two years he has received refunds for 100% of his tax withheld by just moving money from one pocket to another.
GravitySucks
Thinks s/he gets paid by the post
I was partially in a target date fund in my 401k that was much farther out then either my planned or actual retirement date. I picked the fund that had an AA that matched my risk tolerance at the time.
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
That's the way to do it IMO... focus on the AA and ignore the date on the fund's name.
Thanks PB.
I researched Turbo tax site for this: Retirement Savers Tax Credit.
"Am I eligible?
To claim a Savers Credit, you must be age 18 or older and you cannot be a full-time student or be claimed as a dependent on someone else's tax return. Your retirement contribution must have been made during the tax year for which you are filing your return. And you must meet the income requirements."
Looks like my son is not eligible. Thanks for the information though. I will make a note for future taxes after he graduates next year
gayl
Thinks s/he gets paid by the post
Agreed but sounds like he went to a luncheon & met with a great salesman! Why couldn't the guy just spout off any one of the other philosophies out there, such as:
Then pick 2 ETFs with lowest expense ratios & stick it there. Should be able to keep expense ratios >.05%
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Well other coworker wants to retire buying silver on ebay. Not kidding. . .
Good info, for those in Fidelity 401ks. Actually, the oldest DS may be in a Freedom Fund. I'll have to ask him. The low expense would be a very attractive option for those who want one and done.
Yarnstormer
Recycles dryer sheets
When I have used target date funds I pick the target date according to when I think I will access that money, no necessarily when my retirement age will be. I chose to put 75% of my income in my 401k last year and that is in a target date way past 65. I plan to access that fund late in retirement (or never) so no need to dial it down when I'm younger.
