Vanguard Target Funds

[RockSplat]

Hello. I am 33 years old and I am currently contributing to the Vangaurd Target Retirement 2030 fund SEP IRA account.

I will be 60 years old in 2037. I have about $140,000 in all of my retirement accounts (Employer 401(k), Vanguard) and about $50,000 of this is in the Target 2030 fund. Going forward I will be putting my retirement savings into my 401(k) enough to get the company match and the remaining into my Vanguard SEP IRA.

I initially took the 2030 fund right around the market crash because it looked less risky than the 2035. But I want to reconsider this.

I can afford some risk though and want to be in a good fund for my age. It would not bother me to see it drop 25% in a bad year. In fact if that happens I would leave the account alone and just add as much as possible.

Would I be better served to jump into the Vanguard Target 2035 or 2040 instead?

I am also doing some research on investing reading Bogle's books. I suppose I could customize something but wouldn't that be the same as trying to beat the Target funds? That seems unlikely to me but I could be wrong. Perhaps I should just stick to a Vanguard Target fund for simplicities sake if it's just as good?

Your thoughts are appreciated. Thank you.

 

[REWahoo]

Hello. I am 33 years old and I am currently contributing to the Vangaurd Target Retirement 2030 fund SEP IRA account.

I will be 60 years old in 2037. I have about $140,000 in all of my retirement accounts (Employer 401(k), Vanguard) and about $50,000 of this is in the Target 2030 fund. Going forward I will be putting my retirement savings into my 401(k) enough to get the company match and the remaining into my Vanguard SEP IRA.

I initially took the 2030 fund right around the market crash because it looked less risky than the 2035. But I want to reconsider this.

I can afford some risk though and want to be in a good fund for my age. It would not bother me to see it drop 25% in a bad year. In fact if that happens I would leave the account alone and just add as much as possible.

Would I be better served to jump into the Vanguard Target 2035 or 2040 instead?

I am also doing some research on investing reading Bogle's books. I suppose I could customize something but wouldn't that be the same as trying to beat the Target funds? That seems unlikely to me but I could be wrong. Perhaps I should just stick to a Vanguard Target fund for simplicities sake if it's just as good?

Your thoughts are appreciated. Thank you.

RockSplat, the last time you started a new thread with a question, you deleted your question after getting several responses. The result was a thread that made no sense. That isn't going to happen this time, is it?

 

[RockSplat]

Please accept my apologies. I have no reason to delete this question. Your advice is valued.

 

[Coach]

RockSplat, I think a target retirement fund is a perfectly reasonable choice. There's no reason to think that you would do much better, on average, if you did your own slice and dice portfolio. Since you sound comfortable with risk, switching to the 2035 or 2040 fund would be reasonable.

This assumes your 401k is also invested in a diversified way, since you need to care about allocation across all investments.

The reason I like target date funds is that they take care of rebalancing and reducing equity exposure over time for you. I've heard quite a few people in the last year or two say that they have delayed retirement because of the market drop. I think a lot of them were more heavily invested in equities than they should have been that close to retirement.

Coach

 

[Animorph]

I select my own funds because I want a different allocation than target funds have. I guess that is kind of trying to beat them, but doing it yourself is not bad, just different.

I'd be comfortable selecting a later year if you'd like to increase your equities stake above what Vanguard has in the 2030 fund. You do seem to be a little early with a 2030 fund. You might also consider your age at retirement and length of retirement in addition. Back when I was looking at them briefly, I was most attracted to funds corresponding to the date I turned 70 or so, though I planned to retire at 54. I went all equities instead, and plan to stay that way throughout retirement. I took a much greater than 25% loss, but I'm back up to "just" 20% loss now and above my minimum requirements. So that works for me.

 

[RockSplat]

Vanguard

On another note, I couldn't be happier with Vanguard. Before Vanguard I was with a large financial advisor firm. It is very nice knowing exactly what I am paying for now and their online resources are great.

 

[RockSplat]

This assumes your 401k is also invested in a diversified way, since you need to care about allocation across all investments.

The reason I like target date funds is that they take care of rebalancing and reducing equity exposure over time for you. I've heard quite a few people in the last year or two say that they have delayed retirement because of the market drop. I think a lot of them were more heavily invested in equities than they should have been that close to retirement.

Coach

Thank you. I will consider Target 2035 or Target 2040. As far as 401(k) -- I am learning as much as I can and will dive into it next. It is currently on an age based system with Prudential and supposedly allocated well. My wife has a 403(b) account with Prudential which is also age based. Some of the fees seem a bit high in her fund selections (up to 1.5%). My 401(k) fund selections however has fees in the .5% - .9% range so it may not need any changes.

I have read in the past that automated age based portfolios are not the best option -- of course a financial advisor probably wrote that..

I have 2 529 accounts with Vanguard that are also age based.

 

[RockSplat]

Back when I was looking at them briefly, I was most attracted to funds corresponding to the date I turned 70 or so, though I planned to retire at 54.

I hope to retire earlier than 60 as well if possible. I have some other businesses that are doing well and I have been investing $5000-5500 a month so hopefully it will pay off.

 

[LOL!]

Target retirement funds are great if you look under the hood and see that what's inside matches the asset allocation that you want. Don't go by a year or date, but go by the percent equities and percent bonds.

However, these funds are not tax efficient, so I would not hold one in a taxable account. If you have only tax-sheltered accounts and have figured out an asset allocation that is matched by a fund, go for it.

If you have a taxable account, then you do not want tax inefficient investments in taxable. This will generally mean not using exclusively a target retirement fund.

 

[RockSplat]

Target retirement funds are great if you look under the hood and see that what's inside matches the asset allocation that you want. Don't go by a year or date, but go by the percent equities and percent bonds.

Right now I'm not armed with enough knowledge to know what asset allocation I want. I am learning though.

It sounds like the Target 2035 would have a good general asset allocation.

Thanks.

 

[charlie]

Personally, I don't think it will make a lot of difference if you pick 2035 or 2040 at this time. The important thing is just keep adding as much money each year as you are able. Over time as you grow in experience and investing maturity you will probably change your mind many times.

Just keep on trucking!

Cheers,

charlie

 

[ultimo]

I have read in the past that automated age based portfolios are not the best option -- of course a financial advisor probably wrote that..

The age-based systems presume that just because you're young that you're willing to take on more risk. VTHRX is in something like 85% or more in stocks for your age category. It hasn't done that well over the past few years, although it's recovered some gains this year because the government's printing money hand over fist. Those stocks are going up only because all that printed money has to go somewhere, that's all.

Seems like you'd want to invest in things which, despite the distortions caused by current fiscal policy, remain intact in terms of their fundamentals?

 

[kyounge1956]

Right now I'm not armed with enough knowledge to know what asset allocation I want. I am learning though.(snip)

Then you might want to check out the Asset Allocation Tutorial.

 

[Animorph]

As to rebalancing, target dates don't let you draw down only the bond side of the allocation during a severe downturn. I'd prefer to have bonds and equities in separate funds at a minimum. I'm not sure how many people actually did that during this last downturn, but a lot of them talk about how many years of withdrawals they have in bonds and claimed to have left equities alone last year. I'm still drawing from cash I reserved at the start of retirement just in case what happened in the past two years did happen. Cash/target would work as well, but then you might not want any bonds.

 

[RockSplat]

The Asset Allocation Tutoral is great. Thanks for the link!

I couldn't figure out how to get my Prudential accounts into the x-ray but I did a quick peak in Quicken and it gave me a rough idea. I don't think it is as accurate as the x-ray so I will try to figure that out later. I look forward to learning more about this so I can find my preferred asset allocation. I am pretty interested in this.

Total $168K
15% - Domestic Bonds
38% - Large Cap
13% - Small Cap
14% - International
20% - Cash (This is mostly an emergency fund - the remaining percentages are in tax deferred retirement.)

I also have $93K in real estate equity but Quicken doesn't list that in the Asset Allocation breakdown.

Are there any good software applications out there that handle asset allocation reports better than Quicken? It would be nice to be able to get this information as accurate as the "x-ray" tool with the click of a button.

Thanks!!

 

[Ed_The_Gypsy]

As to rebalancing, target dates don't let you draw down only the bond side of the allocation during a severe downturn. I'd prefer to have bonds and equities in separate funds at a minimum. I'm not sure how many people actually did that during this last downturn, but a lot of them talk about how many years of withdrawals they have in bonds and claimed to have left equities alone last year. I'm still drawing from cash I reserved at the start of retirement just in case what happened in the past two years did happen. Cash/target would work as well, but then you might not want any bonds.

This is a very important point.

I am thinking that you are not supposed to touch the target date fund until it matures. Then you can divide the proceeds up into equities and bonds and take distribution as you see fit. This assumes that you are OK with doing things yourself by that time.

At some point, one might want to get rid of stocks entirely and put it all in something that can't lose value. Then arrange for automatic distribution by Vanguard.

 

[Alan]

This is a very important point.

I am thinking that you are not supposed to touch the target date fund until it matures. Then you can divide the proceeds up into equities and bonds and take distribution as you see fit. This assumes that you are OK with doing things yourself by that time.

At some point, one might want to get rid of stocks entirely and put it all in something that can't lose value. Then arrange for automatic distribution by Vanguard.

I'm not sure what the fund allocation becomes once it matures and goes well beyond. If it goes to something like 35/65 and continues to become more bond heavy as the years roll on then you could simply stop the dividends from reinvesting and take them as income. This is what I'm planning to do with my Wellesley fund plus I have a 10 - 15% cash bucket to draw from as well.

 

[charlie]

I think all the Target Retirement funds morph into the Target Retirement Income Fund at the end.

Cheers,

charlie

 

[Alan]

I think all the Target Retirement funds morph into the Target Retirement Income Fund at the end.

Cheers,

charlie

that sounds about right - 65% bonds, 30% stocks and 5% cash. Yield is currently 1.89% so not a lot of income from such a high allocation of bonds.

Wellesley (65% bonds) is 3.31% yield and even Wellington is 2.51% with only 35% bonds - probably Target Retirement Income is less volatile.

 

[tsturbo]

Target retirement funds are great if you look under the hood and see that what's inside matches the asset allocation that you want. Don't go by a year or date, but go by the percent equities and percent bonds.

However, these funds are not tax efficient, so I would not hold one in a taxable account. If you have only tax-sheltered accounts and have figured out an asset allocation that is matched by a fund, go for it.

If you have a taxable account, then you do not want tax inefficient investments in taxable. This will generally mean not using exclusively a target retirement fund.

Please help me understand the tax efficiency aspect. I just invested my Roth IRA in the VG Target Retirement 2025, is a Roth IRA considered a taxable account?

I also have my 401K rollover account in a VG Target fund, but I considered this tax sheltered because I don't pay any taxes until I withdraw $$ when I retire. Thanks in advance for helping me understand and clarifying!

 

[LOL!]

Your Roth IRA is not considered a taxable account. The TR 2025 is an appropriate fund for your Roth. And you are right about the 401(k) rollover account (rollover IRA) being tax-sheltered, so a VG TR fund is just fine there as well.

Your interest-bearing checking account is a taxable account. Any account that you get a 1099DIV or 1099INT is a taxable account.

 

[tsturbo]

Your Roth IRA is not considered a taxable account. The TR 2025 is an appropriate fund for your Roth. And you are right about the 401(k) rollover account (rollover IRA) being tax-sheltered, so a VG TR fund is just fine there as well.

Your interest-bearing checking account is a taxable account. Any account that you get a 1099DIV or 1099INT is a taxable account.

AWESOME - Thank you for such a quick reply!

Also - I am 50 and spouse is 52, was investing 60% equity and 40% bond, the TR 2025 seems a little more agressive, would you consider this (2025) to be about right for age? Hope/plan to retire in 15 years, might work PT to help supplement income after that, but nothing major.