Target Dating

Kyle McIntosh

IN JULY 2020, I rolled over my old 401(k) to an IRA. Between maxing out my 401(k) contributions for many years and strong investment performance, the balance was significant.

I initially invested half the money in a combination of stock market index funds and a bond market ETF. For the remaining balance, I set up an automatic investment plan that invested a modest amount in stock index funds every two weeks. While long-run market returns argued for investing all the money in stocks right away, I slept better using this gradual approach.

After about a year, I calculated that it would take another few years to put the remaining cash to work. This seemed too slow to me. After some research, I invested the rest of the account balance in Vanguard Group’s 2050 target-date index fund. This was the first time I’d put money in a target-date fund, but I don’t think it’ll be the last.

Why select a target-date fund? First, I like that the 2050 fund has a similar investment mix to my other IRA investments. The 2050 fund’s current allocation is set at 90% stock index funds—a U.S. index fund and an international one—and 10% bond index funds. Another feature I like: The stock market exposure decreases over time. The allocation will drop from 90% today to 80% by 2030, 65% by 2040 and 45% by 2050. I’d probably be doing something similar anyway, so why not let Vanguard do it for me?

The Vanguard 2050 fund’s annual expense ratio is 0.15%, or 15 cents a year for every $100 invested, which is about 0.1 percentage point higher than Vanguard’s S&P 500 index fund. I see this premium as acceptable, given the 2050 fund’s broader diversification and its gradually shifting investment mix, plus the fund’s expenses are set to drop next February. A heads-up: Vanguard will direct you to a target-date fund based on an assumed retirement age of 65. But I see myself working fulltime until 65 and part-time into my 70s, so I selected the 2050 fund, which assumes a retirement age for me of 75.

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1 year ago

I have a similar story but with a different outcome.

I, too, had rolled over various 401ks but not all at one time, over course of about 10 yrs (I hopped around a lot) and the total sum of them was substantial. Let’s be specific: I had about $280k total. I knew it was a mistake to leave the money with a past employer but I was too lazy to structure my retirement portfolio by investing in specific mutual or ETFs. So, I just threw the money into Target Date funds.

Years later, in 2017, I changed careers and earned several securities licenses including those which qualified me to become an RIA.

Figuring I was now a sophistocated investor, I used the resources I had at my finger tips with my broker/dealer and asked for an analysis of my retirement portfolio (which also contained another $226k in both Roth & Traditional IRAs)

My hunch was right. My overuse of Target date funds and the fact that I had over $500k in total qualified accounts meant that my portfolio was out of whack with who I was and how much I had to invest. I got rid of the Target date funds, ditched some sector funds and a high yield bond fund and did a total reconstruction, one that was well diversified and well balanced.

Target date funds are great for a small investor who wants to set it and forget it. But when you get into the realm of actually having money which allows you to truly diversify and is tailor made to your risk profile (which no Target Date fund is), then you are better off.

1 year ago

Was half your 401k invested in cash before you considered the rollover? If not, what was your reasoning for taking half the rollover out of the previously non-cash investments?

Roboticus Aquarius
Roboticus Aquarius
1 year ago

Nice summary of how and why to use a TDF. It’s also good to point out as you do indirectly that it’s a fine way to invest very large sums of money. I’ve seen people ask if their Index fund investments are sufficiently sophisticated when one has millions, or even tens of millions of dollars to invest. The answer is yes, of course, many do. It is still effective and appropriate and even such large sums are not going to have any impact on the liquidity of a fund like VTSAX (Vanguard Total Mkt) or SPY.

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