Is there any downside to opening up a Fido Freedom Fund or a Vanguard Target Fund and not use the fund as a retirement fund? Does it make sense to use one of these funds as simply a mutual fund that one invests in?
Freedom or Target Funds for non-retirement accounts
- Thread starter redduck
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I'm not sure I completely understand your question, but, it just basically allocates your money based on a specific date that you'd expect to withdraw on. For instance, the 2015 target retirement fund is set up to become an income fund after 2015, and until then, it has more equity for growth.
You could use it as a time-based goal fund, like if you want to take it out to pay for X at a certain time, but it isn't really good in taxable accounts, as it changes allocation as you get closer to the end date, and then gets very heavy on the bonds.
You could use it as a time-based goal fund, like if you want to take it out to pay for X at a certain time, but it isn't really good in taxable accounts, as it changes allocation as you get closer to the end date, and then gets very heavy on the bonds.
yakers
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I don't know where it is posted but I assume there is some rating of the tax efficiency of each fund. If you can select the most tax efficient of the target funds then it may be a good taxable choice. Mine is in my retirement tax deferred fund so I don't worry about the tax implications of rebalancing or changes in the AA over time. But if you do not have an opportunity for holding bonds on a tax deferred/tax free basis and you have to have bonds somewhere it might as well be in a target fund.
I guess I should added some more information regarding the question. The person who is thinking of using one of these funds is a 32 year-old and is currently fully funding his Roth IRA. He is thinking of investing his excess money in either a Freedom Fund or a Target Fund, but not using the fund as an "offical" retirement account.
chinaco
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redduck said:
People invest money for some reason. A car, a house, retirement, get rich, rainey day fund, security, etc... Otherwise, they would just spend the money now to enjoy it.
What is this person's motivation and the time horizon when the funds will be needed?
There is nothing wrong with investing in those funds for other purposes, however they were designed specifically to progressively get less risky over time... for people that age and retire and want to take less risk later when they approach retirement (auto-pilot).
mathjak107
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the lifestyle funds are not a bad choice but keep in mind 2 things.
they work best when used alone with no other fund holdings as then the concept gets out of whack as your allocations overall may not match your age.
the other issue is if your going to dollar cost in over time they dont work as well as a lump sum invested all at once . since the markets going up most of the time when you buy in over time you may end up being more conservative than you should be as you buy in at a higher and higher price while the stock allocations are reduced over time
they work best when used alone with no other fund holdings as then the concept gets out of whack as your allocations overall may not match your age.
the other issue is if your going to dollar cost in over time they dont work as well as a lump sum invested all at once . since the markets going up most of the time when you buy in over time you may end up being more conservative than you should be as you buy in at a higher and higher price while the stock allocations are reduced over time
teejayevans
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I may be wrong, but I don't think those funds are designed to have all the fundsredduck said:
removed on the target date, but instead are designed to have funds removed
over time starting on that date, big difference.
TJ
terminator
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When I looked at those my biggest "problem" with them was the expense ratio (about .75%). Not outrageous by any stretch but the same thing can be accomplished for quite a bit less with index funds.
LOL!
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Expense ratios of Vanguard target retirement funds are 0.21%
For taxable accounts, I think they are good starter funds to give you instant asset allocation. But they are not the most tax efficient. If you could put assets that generate distributions each year (bond, fixed income, REITs, and dividend-paying funds) into your tax-deferred or Roth accounts you would not pay taxes each year on the distributions. If you could put tax-efficient (large cap index funds, some international funds) into your taxable account, then distributions would be minimized and so would the taxes.
So while target retirement funds are an excellent way to get started and perhaps to use in retirement accounts, I do not think they are the best way to invest in taxable accounts.
For taxable accounts, I think they are good starter funds to give you instant asset allocation. But they are not the most tax efficient. If you could put assets that generate distributions each year (bond, fixed income, REITs, and dividend-paying funds) into your tax-deferred or Roth accounts you would not pay taxes each year on the distributions. If you could put tax-efficient (large cap index funds, some international funds) into your taxable account, then distributions would be minimized and so would the taxes.
So while target retirement funds are an excellent way to get started and perhaps to use in retirement accounts, I do not think they are the best way to invest in taxable accounts.
yakers
Thinks s/he gets paid by the post
The Lifecycle or other fixed AA funds may be a better idea. My older boy started, at my suggestion, his IRA in VG Star fund. Instant diversification with a small contribution. There are other good ways but this is the one I recommended to my own family.
mathjak107
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terminator said:
keep in mind the people who want the simplicity of a lifestyle fund with all the automatic adjustments are not generally the type of people who are going to start researching index funds and making yearly adjustments in the mix as well as pay commissions to do it. in this case i vote stay with lifestyle funds
We are trying to answer a similar question for my mother-in-law. She is new to investing, but has life insurance money (about 30K) to invest immediately and will be adding about 10K per year to the account. This is aside from an IRA, so all taxable.
I was leaning toward a single either target retirement or lifecyle fund, to keep things as simple as possible. She is new to investing and won't like the complexity of owning several different index funds.
I agree, they're not optimal, but they're not so bad in this case, are they? She doesn't need any income, so I'd prefer fewer distributions, but I just don't see putting her into multiple funds right now. I think you'd want at least a total market index, some international, and a bond fund, right?
I was leaning toward a single either target retirement or lifecyle fund, to keep things as simple as possible. She is new to investing and won't like the complexity of owning several different index funds.
LOL! said:
I agree, they're not optimal, but they're not so bad in this case, are they? She doesn't need any income, so I'd prefer fewer distributions, but I just don't see putting her into multiple funds right now. I think you'd want at least a total market index, some international, and a bond fund, right?
