can i use a target fund play catchy up?

Jun 23, 2007 3 Replies
S

I'm a latecomer to the retirement savings world. 43, recently married, new kid. I've got 10,000 in a 401-k with vanguard that i need to roll over into an ira since i'm now working as a freelancer. I'm willing to go with a target retirement fund but i've got some gound to make up and am afraid a target fund based on me retiring in, say, 20 years, at



63, would be way too conservative. so . . .


  1. would it make sense for me to instead choose a target fund that's looking out 30-35 years instead of 20, gives me the agressive stance i need to take to catch up, but then can be modified when i do get to the point later in life when i have to be conservative.



  1. skip the target all together and try to customize something, maybe some agressive small cap, international and balancve some with a large index or total market?
  2. finally, any thoughts on Vanguard vs. T. Rowe Price vs. Tia-Cref? I'm OK with vanguard but have heard some good things about the others.

here's current mix



Lord Abbett Small-Cap Value 9.37% Templeton Instl Emerging Markets 10.60% Vanguard Capital Opportunity Fund Investor Shares 19.62% Vanguard International Growth Fund Investor Shares 15.70% Vanguard LifeStrategy Growth Fund 44.71%



performances 1 Year 3 Year 5 Year 10 Year Since Inception Capital Opportunity Inv 20.49% 15.34% 15.26% 17.09%



International Growth Fund 27.96% 23.34% 16.10% 8.10% 13.40%



LifeStrategy Growth Fund 21.45% 14.33% 10.99% 8.42 10.80%



If i stay with vanguard, i'll have to lose the lord abbet and the templetn, since they were attached only via my company.



Vote
Twitter Facebook LinkedIn
S

Here's something you didn't mention: is it possible for you to do a Roth conversion on this rollover money, or is your income too high (AGI over $100K), or do you not have enough savings from other sources to pay the taxes that would be due? $10K in a Roth IRA is worth more than $10K in a traditional IRA, because in the latter case you'll still have to pay taxes on withdrawals. This would really be the best way to get more bang for your buck in your retirement account. And, of course, you and your spouse should start maxing out your Roth contributions so that your retirement account will continue to grow.

Yes, you can do this, but you should also be aware that all target funds with the same date are not created equal! :-) For instance, both T. Rowe Price's 2030 fund (TRRCX) and Vanguard's (VTHRX) hold 85% stocks, while Fidelity's (FFFEX) is a tad more conservative at 80% stocks, and TIAA-CREF's entry (TCLNX) holds only 70% stocks.

If you google for "asset allocation" "efficient frontier", you'll find some references that indicate a portfolio that holds some bonds has higher returns as well as lower volatility than a pure-equity portfolio. If you want a simple slice-and-dice approach that would work with your 10K, you could try

20% TSM or S&P 500 index 20% actively-managed large-cap value fund 20% international 20% small/midcap 20% bonds

Or, for a simple portfolio that will let you sleep at night, open your account at Oakmark and do:

80% OAKBX 20% OAKIX

Are you talking about these companies as a brokerage, or as a fund family? As far as choosing a brokerage is concerned, unless you are going to buy funds that are only available directly from the distributor (like the Oakmark funds above), I'd suggest comparison-shopping the various financial supermarket sites and opening your account there.

As far as fund companies go, Vanguard is known for its low-fee funds, but many of them have initial investment requirements that may be too high for someone who's just starting out. You'll have to check the specific funds you're interested in. T. Rowe Price is generally highly regarded as being shareholder-friendly. TIAA-CREF, OTOH, has been involved in some dirty business with fund management; see

formatting link
7835&_QSBPA=Y Fidelity is OK, except for their penchant for switching managers every few months at many of their funds, and for letting successful funds get way too big before closing them (e.g., FCNTX and FLPSX). A number of smaller fund companies like Dodge & Cox, Oakmark, Ariel, etc are also highly regarded as good companies to do business with.

You may very well find that you'll need to liquidate all your holdings when you do a rollover, anyway.

-Sandra the cynic

Vote
Twitter Facebook LinkedIn
E

Instead of any Target Fund, why not just go to Vanguard and put it all in the LifeStrategy Growth Fund? That has the aggression you're looking for and you're already familiar with its behavior.

Elizabeth Richardson

Vote
Twitter Facebook LinkedIn
W

I'm ordinarily a fan of Roth conversions, but this last sentence is a pretty strong statement. The conversion is only favorable if the OP will have a higher marginal tax rate in retirement than now. We haven't seen any details about the OP's income, but given his implied paucity of savings, and the possibility that he is in or near his peak earnings years, he could very well have a lower marginal tax rate in retirement. If so, he would be better off saving the money that would have been used to pay taxes on the conversion. Heck, he might even be better off using the money to buy a flat screen HDTV.

Unless the reference is looking at short-term performance, I don't think you'll find this. The first non-paid reference I found by using your google search led me to this:

formatting link
The "Adjusting the Portfolio" section and the "Adjusting the Risk" chart indicate that adding bonds to a portfolio reduce risk at the cost of performance. But a main point of asset allocation is that you can reduce risk *substantially* without *much* performance decrease by addign some bonds to an equity portfolio.

-Will

Vote
Twitter Facebook LinkedIn

Join the Discussion

Have something to add? Share your thoughts — no account required.

Didn't find your answer?

Ask the community — no account required