Vanguard target retirement fund 2045 advice

[savemachine]

Hi all, I'm back once again looking for advice. I'm 27 years old with 22K in 401K, ~10K in ROTH IRA, and ~10K in saving account.

I'm thinking of purchasing said mutual fund soon in which I will take out 5K from my 10K savings to buy it. I guess my question is a very arbitrary one. I'm obviously looking to be agressive and I don't really like to manage anything (I lack the knowledge actually). This fund is spoken very highly of by members on this forum, and currently it is the fund that I am looking at. I do want it to be my retirement fund (the goal), so my question is along the line of how much money should I be putting into this fund?

I know the question is very subjective, but I am planning to pour a lot of money into this fund maybe at 10K-15K a year (I make about 70K) and I'm not sure if this is the right direction to take?

Thanks for your advice.

[noppenbd]

This is a great choice if you do not want to mess with a lot of different funds. Just "set it and forget it". The current mix of assets for the 2045 fund is 72% Total Stock Market Index, 10% Total Bond Index, 10% European Index, 4.5% Pacific Index, and 4% Emerging Markets Index. So it is quite aggressive. In this case there isn't much risk inherent in using a single fund since all of the components are broad-based indexes.

[savemachine]

Thanks noppenbd. I've just pulled a trigger and put in 5K. Hoping to put in more as the years go on.

[Broken Arrow]

What is the current make-up of your 401k and Roth IRA? The entire retirement portfolio, taken as a whole, needs to be considered. Even with 5k in a target retirement fund with a long horizon, if the 32k you have is in... low interest bonds for example, then your entire asset allocation is going to be out of whack.

Target retirement funds are ideal when used as the sole fund you own... because it's already "properly-diversified" for you.

Also, where did you put this target fund? A taxable or tax-deferred like your Roth? The tax implications of the fund may be minimal now, but as time goes by, it will become more and more of an issue. Target retirement funds are really meant to be in tax-deferred accounts only....

I'm sure it's not a big problem or anything, depending on the make-up of your entire retirement portfolio... Just something you'll want to iron out when you get the chance....

Although I am a fan of the target retirement type funds, especially if you don't want to do your own asset allocation and re-balancing.... However, it's not the only way to go about it, and it needs to fit your portfolio....

[savemachine]

Here's my make up. Admittedly, I have no clue what I'm doing but can you analyze these and see if I'm on the right track?

401K
Large Cap Value
COL VALUE & RSTRG Z $5,343.91
Small Cap Growth
TURNER EMRG GRTH INV $3,786.58
Foreign
INTL EQUITY BLEND $2,773.38
DODGE & COX INTL STK $1,468.71
Specialty
REAL ESTATE SEC FUND $1,875.44
Large Cap Growth
VANGUARD PRIMECAP $2,021.94
Large Cap Blend
HARTFORD CAP APP IA $1,484.02
Mid-Cap Growth
MUNDER MDCPCORE GR Y $1,522.62
Mid-Cap Blend
TCW VALUE OPPS I $1,403.20
Blended Fund Investments*
Balanced
FID BALANCED $1,981.66

ROTH IRA
The Growth Fund of America – A ~ $2000
The Investment Company of America – A ~ $2000
PFE ~ $2000
VTI ~ $1000
EFA ~ $1000

Mutual Fund
Target Retirement Fund 2045 ~ $5000

Saving
WAMU online savings ~ $5000

[savemachine]

By the way, the retirement fund is not in my roth. It's just a personal account. Should I move that towards my ROTH IRA? The thing is, I still am planning on doing that, but ROTH has a limit of 5K for year 08 right?

I guess what I'm trying to say is that, I want to still invest money somewhere else aside from a bank and ROTH IRA, but I'm the type that has no knows in maintaining portfolio and are not very strong when it comes to researching something.

Suggestions?

[noppenbd]

Generally the advice is to max out tax-sheltered retirement savings before investing in after-tax accounts. Are you maxing 401k and Roth IRA currently?

[noppenbd]

I had a bit more time so I looked at your overall asset allocation.

Totaling 401k, Roth and taxable account (with Vanguard Target 2045 fund) you are at

49% Large cap US
24% Small cap US
19% International
5% REIT
2% Bonds

This is basically a 50-25-20 mix with 5% REIT. I think it is a totally reasonable AA for someone your age. The only change I would make is selling the Pfizer stock and putting it into VTI. That's because I don't advocate holding single stocks for average investors.

As far as the suitability of the Vanguard Target Retirement 2045 for a taxable account, the distributions are quite low ($.37 a share in 2007), and since it is composed of indexes, I think tax consequences are going to be minimal. You may want to reevaluate it in 5 years or so and see if the tax burden is growing. Vanguard says they can be suitable for taxable accounts "depending on your tax situation".

[humandraydel]

First of all, congratulations on starting investing at such an early age. With just a little knowledge, you will be WELL on your way to a happy retirement. A few suggestions:

What are the Expense Ratios (ER) for your mutual funds? Some of them seem to me like they may be expensive. While you are at it, you may want to list all the funds available in your 401k as well as their expense ratios.

I encourage you to invest in a taxable account, but special attention should be paid to the funds held in a taxable account. I wouldn't put a Target Retirement fund in taxable. The problem isn't the expense of taxes NOW, while you have $5k in it. The problem is that in 20 years, the fund will have grown considerably AND it will have SIGNIFICANTLY more bonds (due to being closer to retirement). Then you are left either paying extremely high capital gains taxes to get out of the tax inefficient fund, or living with the tax consequences.

[noppenbd]

Originally Posted by humandraydel

I encourage you to invest in a taxable account, but special attention should be paid to the funds held in a taxable account. I wouldn't put a Target Retirement fund in taxable. The problem isn't the expense of taxes NOW, while you have $5k in it. The problem is that in 20 years, the fund will have grown considerably AND it will have SIGNIFICANTLY more bonds (due to being closer to retirement). Then you are left either paying extremely high capital gains taxes to get out of the tax inefficient fund, or living with the tax consequences.

I agree. That's why I suggested he reevaluate in 5 years and see how the taxes are shaping up. TR 4045 is 90% equities right now and should be fairly tax efficient for the next 5-10 years, and should be an ok choice for this amount of money. By the time he gets there, he should have enough to meet fund minimums and diversify more specifically (rather than the plain vanilla TR fund).

[humandraydel]

Originally Posted by noppenbd

I agree. That's why I suggested he reevaluate in 5 years and see how the taxes are shaping up. TR 4045 is 90% equities right now and should be fairly tax efficient for the next 5-10 years, and should be an ok choice for this amount of money. By the time he gets there, he should have enough to meet fund minimums and diversify more specifically (rather than the plain vanilla TR fund).

Using TR2045 for 5-10 years certainly isn't a terrible thing to do. But even in 5-10 years there may be some moderate capital gains, and selling to diversify will trigger a taxable event. I know, I'm picking nits, but it's something to consider. Or maybe I just hate paying taxes THAT much

[Broken Arrow]

Originally Posted by humandraydel

Using TR2045 for 5-10 years certainly isn't a terrible thing to do. But even in 5-10 years there may be some moderate capital gains, and selling to diversify will trigger a taxable event. I know, I'm picking nits, but it's something to consider. Or maybe I just hate paying taxes THAT much

Perhaps, but if so, you aren't the only one.

Savemachine, have I mentioned that you're doing great? Actually, I wish I could've done as well when I was 27.

Anyways, my suggestion is, within the next year or two, you'll want to slowly move all your tax-inefficient funds and investment into the tax-deferred accounts, and leave your most efficient funds for your taxable account. I would also look into perhaps even selling some of the funds into simplifying and streamlining all 3 accounts....

No need for major surgery... your 401k actually looks OK at first glance (but didn't calculate). For the Roth, if you really don't want to mess with your retirement accounts, see if you can't get your entire portfolio into a target retirement fund instead.... It wouldn't hurt to look into that for the 401k too, if you want.

[savemachine]

Hey thanks guys for all your help.

Broken Arrow: I'm just trying my hardest to put things away at the moment you know. It's everything from no pension, no social security benefits by the time I retire, and being stuck in a job are the main reasons why I'm trying to save up as much as I can. Thank you for you complment.

I have put it in a regular account for the target retirment date mutual fund (Not sure what I was thinking when I pulled the trigger since now it just makes sense to put it in a ROTH IRA first). Anyway, live and learn.

Thank you again, I will keep reading this space and hopefully will be able to know enough to help someone out.

[Broken Arrow]

Originally Posted by savemachine

(Not sure what I was thinking when I pulled the trigger since now it just makes sense to put it in a ROTH IRA first). Anyway, live and learn.

The fact that you've even done that has put you light years ahead of many of your peers. And anyway, it's an entirely fixable situation. But yeah, I'm learning too.

[threebeansalad]

I'm 30 and invest all my Roth contributions Target 2045. I currently don't have any access to a 401(k) or 403(b). So sad!

[Scanner]

Let's use a scale of 1 to 10 for risk (market, inflation and principal risk) to give you my opinion on riskiness.

Inflation risk: 7
Market risk: 5
Principal risk: 5

With 50% of your portfolio in domestic stock, to me, the main risk you have is domestic American stock underperforming the next 20 years (inflation risk).

Your international at 19% is a hedge on that somewhat though, which is why you aren't at a 10.

Personally, I think you are overdiversified.

You have about $31,000 in retirement. . .IMO, the maximum number of sectors/funds you should own should be 3. Or you can just shove them all into Vanguard 2045.

I know the forum hates to liken investing to gambling but sometimes the analogy holds up. . .you spread your chips all over the roulette table and you aren't going to win anything.

Now. . .you have another $5000 sitting in a mutual fund that's not earmarked for anything. . .this should be in a tax efficient fund or ETF that's blended, if this is for a house or something.