Vanguard Target Date Retirement Accounts

[primarycaredoc]

Hello,

Long time reader/podcast listener, first time poster.   Wanted to first thank WCI and the rest of the frequent posters on this site for helping me to gain some personal finance knowledge.  I hope to keep on learning as you all keep on posting!

I want to assess the pros/cons of target date retirement funds at Vanguard.  I think many on this site would think that it is not worth the additional fees to purchase these funds vs just creating a similar fund allocation yourself.  The Vanguard 2045 retirement fund (VTIVX) has fees of 0.15% vs the total stock market fund (VTSAX) of 0.04%.  I am aware that a 0.11% difference in fees over a few decades is not insignificant.  But the total international stock (VTIAX) and international bond funds (VTABX) that make up the retirement fund, have fees of 0.11.  Quite close to 0.15%.  To me it is potentially worth the 0.04-0.1% difference to not have to worry about re-balancing every yr or changing that balance as I get older.  Thoughts?

Separate but similar question -- how do people feel about putting money into Vanguard retirement funds of shorter duration for money that they anticipate they may need in the 3-7 yr time frame (for home down payment)? For example, putting money into Vanguard’s 2020 or 2025 retirement fund for this purpose?

Thanks for the input in advance!

[Peds]

TDF are worth it for those that can't/won't manage themselves.
Assume you will lose half your stock portion. So an 80:20 fund will lose 40% of is value . If that doesn't affect your DP plan then go for it.

[Donnie]

Target date funds are fine in retirement accounts. I wouldn’t put them in taxable. Keep cash you need in a few years in cash/CDs/savings accounts.

[Ophtho2]

What do you mean “assume you will lose half your stock portion”? Thanks

[docnews]

I am a huge fan of them. See my post where I disagree with WCI about these funds:

https://www.whitecoatinvestor.com/forums/topic/7-reasons-i-do-use-a-target-retirement-fund/

The biggest argument against them is in the taxable account: they are not super tax efficient due to the bonds and it eliminates tax loss harvesting. For me I use it in my maxed out bdRoths/i401k/famHSA. As for my taxable I plan on making after I squash my debt, I plan on using Ibonds and VTSAX.

[artemis]

Ophtho2 wrote:

What do you mean “assume you will lose half your stock portion”? Thanks

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Stocks can crash and stay down for years (or even decades:  look at Japan’s stock market crash in the late 1980s, or the Nasdaq in 2001).  In the worst crash in US stock market history (the Great Depression), the value of the stock market fell by almost 90%.  Twice in this century we’ve seen the overall value of the market fall by 50%.  Yes, the market usually recovers eventually, but there’s no way to predict how long that recovery might take.  So to reap the benefits of stock market investments you need to have a reasonably long investment horizon and the ability to stick to your plan even in the face of large drops in your investment’s value.  If the thought of seeing your portfolio’s value abruptly drop by a large amount freaks you out, lower the percentage of stocks you hold and increase the percentage of bonds until you reach a number that allows you to sleep well at night.

[cfitzge1]

I currently have a target retirement account at Vanguard. Its expense ratio is 0.16%. I was thinking of switching to some mutual funds at Vanguard instead but some of the expense ratios are .11%.

 

So would my new portfolio expense ratio be the sum of the individual expense ratios of the funds in my portfolio or is it a weighted towards the % of each fund in the portfolio?

 

I'm trying to decided if its cheaper to continue with the Retirement account vs choosing my own mutual funds.

 

Thanks for the help

[Kamban]

cfitzge1 wrote:

So would my new portfolio expense ratio be the sum of the individual expense ratios of the funds in my portfolio or is it a weighted towards the % of each fund in the portfolio?

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My thinking is that is weighted for the amount of money you hold in each - an extreme example is 500K in a 0.1 expense ratio and 100K in a 0.3 expense ration is not a final expense ratio of 0.2 for the 600K.

[CordMcNally]

cfitzge1 wrote:

I was thinking of switching to some mutual funds at Vanguard instead but some of the expense ratios are .11%.

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This sentence confuses me because of the 'but' in there. It makes it seem like going from 0.16% to 0.11% is a bad thing.

 

cfitzge1 wrote:

So would my new portfolio expense ratio be the sum of the individual expense ratios of the funds in my portfolio or is it a weighted towards the % of each fund in the portfolio?

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I've never really seen somebody calculate an entire portfolio expense ratio. Seems like too much work for largely irrelevant information. If you wanted to do it, it would need to be weighted to be accurate.

 

cfitzge1 wrote:

I’m trying to decided if its cheaper to continue with the Retirement account vs choosing my own mutual funds.

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You're almost always going to be able to get lower expense ratios if you choose your own funds. There's nothing wrong with sticking with the target date fund for now while you expand your finance/investing knowledge.

[Larry Ragman]

I use TD funds exclusively in my various retirement and deferred compensation accounts. I am fortunate that my work place has access to the Vanguard institutional shares. Largely addresses the ER issue. For example, 2025 TD institutional shares are only .09%.

[PhysicianOnFIRE]

CordMcNally wrote:

I’ve never really seen somebody calculate an entire portfolio expense ratio. Seems like too much work for largely irrelevant information. If you wanted to do it, it would need to be weighted to be accurate.

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My spreadsheet does this -- a weighted average. Under 0.07%. Allow me to display my mathletic prowess.




It's not totally irrelevant. It's helpful to know that I'm paying $680 per million dollars invested per year via the expense ratios of the funds. There are also some fees in the 457(b) and 401(k) that don't show up here. I know they're measured in dozens of dollars or a couple hundred dollars at the most.

Cheers!
-PoF

 

[burritos]

My wife doesn't like to manage/tinker. To avoid reduction of the stock percentage we just invest in the most distant target date. Our plan is to retire is in about 10 years(2030). The target fund my wife is in is 2060 vanguard target trust(via kaiser). Hard to beat a .06% expense ratio.

[cfitzge1]

Thanks for the replies.

 

I used "but" since the target retirement account is 0.16 and only one of the mutual funds has an expense ratio of 0.11 - so by the time you build the portfolio, the expense ratios is likely to be greater than the expense ratio of the retirement account.

 

I'm new to investing and in it for the long run. I'm trying to minimize my expenses so trying to decide if the retirement account is the way to go vs build-it-yourself

[Bmac]

It's funny that now people complain about ERs of 0.16. I'd say there is nothing whatsoever wrong with using a target date fund in a retirement account. Not only does it make life much easier, it makes tax loss harvesting in taxable accounts much easier, in my opinion. And again, do not lose sight of the fact that and ER of 0.16 is historically VERY low for the mutual fund industry.

[CordMcNally]

PhysicianOnFIRE wrote:

It’s not totally irrelevant.

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Like I said, not totally, but largely. ;-) Once you get all of your expenses ratios in the range as most members on here, your time is better spent buying and eating cheese!