what would you do with this small amount of savings

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Topic Author
Splais
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what would you do with this small amount of savings

Post by Splais »

So I am 70, single, in good health, and retired from federal civil service. I have never been any good with money. Just recently I got things in order finally and have no debt at all other than my mortgage. I have a couple thousand dollars in an everyday-extra-expenses savings account I put $300 a month into. I have another account I put $414 a month into I use to pay all my quarterly, semiannual and annual bills from. I also have $5500 in Vanguard Target Retirement Income Fund. I make automatic monthly deposits of $300 into this account. I don't ever plan to spend this money on anything but something really serious.

My question relates to this money in VTRI. Am I crazy to leave this money in VTRI. Considering risk and all should I just take it out and put it and the $300 monthly deposits in a money market? I'm torn because in the last couple of crashes I noticed that VTRI recouped it's loses in a couple of years.
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frugaltype
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Re: what would you do with this small amount of savings

Post by frugaltype »

Not answering your question, because I have no idea, but how secure is your financial situation - do you have a pension or SS adequate for your needs for the rest of your life?
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nisiprius
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Re: what would you do with this small amount of savings

Post by nisiprius »

Considering risk and all should I just take it out and put it and the $300 monthly deposits in a money market? I'm torn because in the last couple of crashes I noticed that VTRI recouped it's loses in a couple of years.
NOT advice, some things to think about.

This fund is about 2/3 bonds, 1/3 stock.

Were you holding it during 2008-2009? If so, you should have some idea about how you feel about the amount of risk.

During 2008-2009, stocks dropped 50%. Since the fund is 1/3 stock, you'd expect it to drop, just roughly, about 1/3 of 50%, or 17%. And that's almost exactly what it did.

So, it dropped a lot less than the orange line, Total Stock, a 100% stock fund. But it did drop 17%. How do you feel about that amount of risk? Losing $900 of your $5,500?

Image

Again, just speaking roughly, if the fund is 1/3 stock, then you could say that close to the worst thing that could happen would be to lose almost all the value of the stock. That means you'd lose about 1/3 of the total value of the fund, $1,800 of your $5,500.

How would you feel about that? Terrible because the glass is 1/3 empty? Thankful that it's still 2/3 full?

Vanguard puts the fund at 2 in their 1-5 risk potential category. Not a very risky fund, but definitely not like a bank account, either. They say:
Vanguard wrote:Image
Conservative to moderate funds—Risk level 2

Vanguard funds classified as conservative to moderate are subject to low-to-moderate fluctuations in share prices. In general, such funds may be appropriate for investors with medium-term investment horizons (four to ten years).
How does that fit with what you are doing?

There are no easy answers. Vanguard Target Retirement Income fund isn't a terribly risky fund and I don't think you are crazy to leave it in there. On the other hand, age 70 is, I am sorry to say, a little late to begin a savings program, and while over the next 10-15 years it will probably grow quite a bit more than in a savings account, it's not going to grow into a life-changing amount of money.

Please don't hold me to these numbers, this is just a really rough guesstimate, but, you have $5,500 now. Call it $6,000. If you keep putting in $300 a month, over the next 10 years you will be putting in a total of $36,000 more.

If you just put it all into a checking account with no interest at all, then, you'd have $42,000.
If we assume a savings account with 1%, interest, $45,000.
IF ALL GOES WELL, and the Vanguard fund keeps earning about 5%/year, $56,000.

$56,000 isn't chump change, but neither is $42,000. Over ten years, it's the saving that is doing the heavy lifting for you, not the earnings.

That extra $14,000--the difference between $56,000 and $42,000 isn't chump change either, and it would be nice to get it, BUT you ARE taking some risk to get it and it is just a guess. Nobody knows the future for this fund.

I would not put too much trust in your observation that "in the last couple of crashes I noticed that VTRI recouped it's loses in a couple of years." It sounds like you're hoping that there isn't any real risk, that it will always recoup its losses in a couple of years. But no, that's not guaranteed. And a couple of years can seem like a long time while you are in them.

It might be very discouraging to see a loss in this fund when you are patiently trying to build it up.

It's your money, you are the one who has to sleep at night. It's not crazy, it's not a terribly risky fund, you have not put your money on a big gamble, but there is an element of chance or risk of gambling in this investment. Nobody is going to tell you that there isn't some risk. Not of losing everything, but of losing 1/6, 1/5, 1/4 of it. If you find that you are getting jittery and WANT to just put it in a money market, I don't think that would be crazy, either.
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Laura
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Re: what would you do with this small amount of savings

Post by Laura »

Money invested in a savings account or CD is guaranteed not to lose money however it will lose value. What do I mean? You are losing to inflation every day which means your purchasing power is dropping. You probably should have some money invested in the market and the Target Retirement income is a good choice. If you have extra money you don't plan to need for a long time then this would be fine. For your money needed to pay bills and for other unexpected daily expenses I would keep the money in the bank.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Topic Author
Splais
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Joined: Tue Mar 12, 2013 11:33 am

Re: what would you do with this small amount of savings

Post by Splais »

thanks much for the replies. Very helpful, sort of :beer
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