Target retirement date fund okay for all accounts?

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cclark
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Target retirement date fund okay for all accounts?

Post by cclark »

In an effort to keep investing "simple" in my mind, I think I've been focusing too much on vanguard target date retirement funds. I like that it's one fund and that it reallocates for me, which I guess equals less worry in my mind. The majority of my husband's rollover IRA is in a target date fund, my roth IRA is in a target date, and so is our taxable account. Is this okay or is this going to get us into some trouble down the road? We're both around 30 years old. I will also be starting a solo 401(k) with Fidelity and I'm not sure what funds to buy.
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Taylor Larimore
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Re: Target retirement date fund okay for all accounts?

Post by Taylor Larimore »

Is this okay or is this going to get us into some trouble down the road?
cclark:

It is going to get you in trouble down the road. This is because Target Funds are tax-inefficient and therefore seldom ideal for taxable accounts.

Most authorities recommend placing only tax-efficient stock funds in taxable accounts and placing taxable bonds in tax-advantaged accounts.

We can make specific suggestions if you follow the format in this link:

ASKING PORTFOLIO QUESTIONS

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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LAlearning
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Re: Target retirement date fund okay for all accounts?

Post by LAlearning »

I would vote everything except taxable.
I know nothing!
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Mel Lindauer
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Re: Target retirement date fund okay for all accounts?

Post by Mel Lindauer »

LAlearning wrote:I would vote everything except taxable.
Yep, me too, in this case.

However, it might be appropriate in a taxable account for retired folks if they're using the distributions for current living expenses.

In addition to automatic rebalancing, having both bonds and equities in the single fund can help investors "stay the course" in bad times, since the bonds in the holding will help "hide" the bad performance of their equity portion which might cause them to bail if they held their equities outside of the Target Date fund.

There's no one right answer for everyone; just what works for you.
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fz583
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Re: Target retirement date fund okay for all accounts?

Post by fz583 »

Mine and my wife's 401k's are in target accounts hers at Fidelity, mine at Vanguard, our Roth's are both in Vanguard target accounts, and we have a taxable account at Vanguard that holds VTI, the money in VTI is next years 2017 Roth contributions with a little extra, I realize I could lose money in that but so far its working out.
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grabiner
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Re: Target retirement date fund okay for all accounts?

Post by grabiner »

There is a tax disadvantage for holding a target-date fund in a taxable account. Depending on your tax situation and stock and bond yields, it might be better to hold bonds or stocks in the taxable account. If you manage everything separately, you can hold whichever class you prefer in taxable.

However, if you value the simplicity of having accounts which manage themselves, this may be worth the cost. I would guess that the cost is likely to be no more than 0.2% in most situations.
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michaeljc70
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Re: Target retirement date fund okay for all accounts?

Post by michaeljc70 »

It depends on your age. If you look at different target funds on Morningstar and compare the tax efficiency to the underlying funds (which I have done), I think you will find that while you are younger (vast majority in stocks), the difference in tax liability will be small. As you move more and more into fixed income, it will work against you.

I've opted to hold the individual funds for 2 reasons: 1) You can buy Admiral shares which will save $$$ on fees and 2) you can properly allocated funds to tax efficient accounts.

Another factor is your % taxable vs tax deferred accounts. If 90% of your investments is tax deferred, this is unlikely to make much difference.
novicemoney
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Re: Target retirement date fund okay for all accounts?

Post by novicemoney »

Mel Lindauer wrote:
LAlearning wrote:I would vote everything except taxable.
Yep, me too, in this case.

However, it might be appropriate in a taxable account for retired folks if they're using the distributions for current living expenses.

In addition to automatic rebalancing, having both bonds and equities in the single fund can help investors "stay the course" in bad times, since the bonds in the holding will help "hide" the bad performance of their equity portion which might cause them to bail if they held their equities outside of the Target Date fund.

There's no one right answer for everyone; just what works for you.
What about using these fund types in order to simplify accounts for a surviving spouse who is just not into managing investments? This is the case for us. We are at 40% taxable. I think DW can handle a 1 fund portfolio. It is either this or pay for help for her if I am gone.
pingo
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Re: Target retirement date fund okay for all accounts?

Post by pingo »

Yes!

Others have already remarked that a taxable account might not be best for a target fund, but if you're in the 15% bracket, I might not worry about it. If you decide not to use a target fund in taxable, it's just as easy (and legit!) to have target funds in every account except taxable. Target/lifecycle/balanced funds were intended to be a complete portfolio. If you're Husband's IRA holds other funds along with a target fund, it may actually be counterproductive and reduce diversification. (More funds is not the same as more diversification. More can be less.)
cclark wrote:I will also be starting a solo 401(k) with Fidelity and I'm not sure what funds to buy.
How 'bout a Fidelity Freedom Index Funds? They are the Fido equivalent (though not an axact duplicate) of Vanguard target funds. Here's one right here: Fidelity Freedom 2035 Fund. The link also has Fido's glidepath, but I prefer to reference the Morningstar.com's glidepath chart: M* Fido 2035 Index portfolio page at the bottom of the page.

Fidelity would prefer you use their actively-managed Freedom Fund series, which I'm not going to knock, but you're not as likely to find their low cost sibling by browsing around the site.

All the best!
Last edited by pingo on Fri Oct 14, 2016 11:16 am, edited 1 time in total.
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triceratop
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Re: Target retirement date fund okay for all accounts?

Post by triceratop »

Mel Lindauer wrote:
LAlearning wrote:I would vote everything except taxable.
Yep, me too, in this case.

However, it might be appropriate in a taxable account for retired folks if they're using the distributions for current living expenses.

In addition to automatic rebalancing, having both bonds and equities in the single fund can help investors "stay the course" in bad times, since the bonds in the holding will help "hide" the bad performance of their equity portion which might cause them to bail if they held their equities outside of the Target Date fund.

There's no one right answer for everyone; just what works for you.
To your knowledge, has there been any news from Vanguard on the topic of Admiral shares in the Target Date funds, since the question was raised to and acknowledged by Mr. Bogle ? This would address some investors' concern over their use.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."
fantasytensai
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Re: Target retirement date fund okay for all accounts?

Post by fantasytensai »

Silly question time. It seems that the consensus is that Target investments are not good for taxable accounts (which I assume is traditional 401k type accounts). Can you explain why?
Da5id
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Re: Target retirement date fund okay for all accounts?

Post by Da5id »

fantasytensai wrote:Silly question time. It seems that the consensus is that Target investments are not good for taxable accounts (which I assume is traditional 401k type accounts). Can you explain why?
Taxable means non-deferred, currently subject to income taxes on earnings/capital gains. i.e. not 401k/IRA/Roth.

This wiki page provides the reason indirectly. All-in-one funds preclude tax efficient fund placement, and also are less than ideal for tax lost harvesting.
https://www.bogleheads.org/wiki/Tax-eff ... _placement

That said, for people who don't want to mess with details, and who aren't in high tax brackets, all-in-one does have lots of virtues. It is simple. It helps avoid bad decisions in declining markets (e.g. people not sticking to their allocations by moving from bonds to stocks as stocks plummet). It helps smooth out visible losses in the individual funds, which some may find makes it easier to stay the course. etc.
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Re: Target retirement date fund okay for all accounts?

Post by neurosphere »

novicemoney wrote:What about using these fund types in order to simplify accounts for a surviving spouse who is just not into managing investments? This is the case for us. We are at 40% taxable. I think DW can handle a 1 fund portfolio. It is either this or pay for help for her if I am gone.
I think this is a perfectly acceptable use for a Target Date Fund in a taxable account. The important thing is that you know and can perhaps estimate/calculate the tax cost of a Target Date fund in taxable when compared to another strategy. If you make a decision with that information at hand, then absolutely, a Target Date fund would work.

I have basically told my wife that when I die she is to to sell everything and buy a Target date fund in all retirement accounts and in taxable with the life insurance proceeds. But I also told her to post here on Bogleheads with the title "my idiot husband pre-deceased me and now I have to clean up his slice-and-dice portfolio mess!" prior to making any big decisions. :D
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Mel Lindauer
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Re: Target retirement date fund okay for all accounts?

Post by Mel Lindauer »

triceratop wrote:
Mel Lindauer wrote:
LAlearning wrote:I would vote everything except taxable.
Yep, me too, in this case.

However, it might be appropriate in a taxable account for retired folks if they're using the distributions for current living expenses.

In addition to automatic rebalancing, having both bonds and equities in the single fund can help investors "stay the course" in bad times, since the bonds in the holding will help "hide" the bad performance of their equity portion which might cause them to bail if they held their equities outside of the Target Date fund.

There's no one right answer for everyone; just what works for you.
To your knowledge, has there been any news from Vanguard on the topic of Admiral shares in the Target Date funds, since the question was raised to and acknowledged by Mr. Bogle ? This would address some investors' concern over their use.
I haven't heard anything yet, but things like this take time. BTW, I'm the one who raised the question, so I think Jack will get back to me when/if he hears something.
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Mel Lindauer
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Re: Target retirement date fund okay for all accounts?

Post by Mel Lindauer »

neurosphere wrote:
novicemoney wrote:What about using these fund types in order to simplify accounts for a surviving spouse who is just not into managing investments? This is the case for us. We are at 40% taxable. I think DW can handle a 1 fund portfolio. It is either this or pay for help for her if I am gone.
I think this is a perfectly acceptable use for a Target Date Fund in a taxable account. The important thing is that you know and can perhaps estimate/calculate the tax cost of a Target Date fund in taxable when compared to another strategy. If you make a decision with that information at hand, then absolutely, a Target Date fund would work.

I have basically told my wife that when I die she is to to sell everything and buy a Target date fund in all retirement accounts and in taxable with the life insurance proceeds. But I also told her to post here on Bogleheads with the title "my idiot husband pre-deceased me and now I have to clean up his slice-and-dice portfolio mess!" prior to making any big decisions. :D
Agree. I think this could be an ideal solution to that kind of problem.
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Re: Target retirement date fund okay for all accounts?

Post by JW-Retired »

Da5id wrote:
fantasytensai wrote:Silly question time. It seems that the consensus is that Target investments are not good for taxable accounts (which I assume is traditional 401k type accounts). Can you explain why?
Taxable means non-deferred, currently subject to income taxes on earnings/capital gains. i.e. not 401k/IRA/Roth.

This wiki page provides the reason indirectly. All-in-one funds preclude tax efficient fund placement, and also are less than ideal for tax lost harvesting.
https://www.bogleheads.org/wiki/Tax-eff ... _placement
fantasytensai,
To get to the heart of it. It's because stock dividends and long term capital gains are favorably taxed in a taxable account, at either zero or 15% rates for all but very high (>$400k) incomes where it's 20%. The same earnings in a tax deferred account like an IRA/401k (when you finally withdraw them) are taxed at your full marginal bracket. i.e. 25%, 28%, 33%, 35%, instead of 15% in taxable, and 15% instead of 0% in taxable.
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michaeljc70
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Re: Target retirement date fund okay for all accounts?

Post by michaeljc70 »

JW-Retired wrote:
Da5id wrote:
fantasytensai wrote:Silly question time. It seems that the consensus is that Target investments are not good for taxable accounts (which I assume is traditional 401k type accounts). Can you explain why?
Taxable means non-deferred, currently subject to income taxes on earnings/capital gains. i.e. not 401k/IRA/Roth.

This wiki page provides the reason indirectly. All-in-one funds preclude tax efficient fund placement, and also are less than ideal for tax lost harvesting.
https://www.bogleheads.org/wiki/Tax-eff ... _placement
fantasytensai,
To get to the heart of it. It's because stock dividends and long term capital gains are favorably taxed in a taxable account, at either zero or 15% rates for all but very high (>$400k) incomes where it's 20%. The same earnings in a tax deferred account like an IRA/401k (when you finally withdraw them) are taxed at your full marginal bracket. i.e. 25%, 28%, 33%, 35%, instead of 15% in taxable, and 15% instead of 0% in taxable.
JW
That is the essence of it. For someone like me that has 85% of investments in tax deferred accounts and 75% allocated to equities, it won't make much difference (though I hold the separate funds anyway due to the admiral shares).
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vitaflo
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Re: Target retirement date fund okay for all accounts?

Post by vitaflo »

Mel Lindauer wrote:
LAlearning wrote:I would vote everything except taxable.
Yep, me too, in this case.

However, it might be appropriate in a taxable account for retired folks if they're using the distributions for current living expenses.

In addition to automatic rebalancing, having both bonds and equities in the single fund can help investors "stay the course" in bad times, since the bonds in the holding will help "hide" the bad performance of their equity portion which might cause them to bail if they held their equities outside of the Target Date fund.

There's no one right answer for everyone; just what works for you.
I agree on "what works for you". My spouse does not want to deal with different funds, managing AA's, rebalancing, etc. Target Date funds (in this case, in taxable) is as simple as it gets. The other option is she gets frustrated and doesn't invest anything in taxable at all.

I'll take sub-optimal tax efficiencies over giving up on investing. Not everyone wants to manage this stuff, and Target Date funds are "set it and forget it".
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Re: Target retirement date fund okay for all accounts?

Post by pingo »

triceratop wrote:To your knowledge, has there been any news from Vanguard on the topic of Admiral shares in the Target Date funds, since the question was raised to and acknowledged by Mr. Bogle ? This would address some investors' concern over their use.
A DIY Investor with Admiral Class funds will rebalance at difference times than Vanguard. The capriciousness of markets from day to day ensure that timing differences will dwarf any small cost advantage of an Admiral Class DIY portfolio (with an identical target allocation) versus Vanguard's Investor Share Target Retirement Funds. If one wins out over the other down the road, it will not be due to the difference in costs.

Even when comparing the Vanguard Target Retirement 2060, 2055, 2050 and 2045 funds (all of which have identical target allocations), I see performance differences of as much as a 4 basis points (0.4%) and 6 basis points (0.6%) over the 1 and 3 year periods, annualized respectively. (Only 3 of them have been around for at least 5 years and 2 for at least 10 years.)

In my employers target date funds, I see spreads as broad as 9 basis points (0.09%) over the last year, 6 basis points (0.6%) annualized over 3 and 5 years, and 11 basis points (0.11%) annualized since inception less than 10 years ago. The "winning" fund(s) are *not* consistent from period to period, either.

Vanguard does have some kind of institutional class versions of their Target funds @ ER 0.08%, give or take. I would welcome Admiral Target funds, of course. Until then, in the choice between using a Vanguard Target Fund or an equivalent DIY portfolio of Admiral Shares, the cost difference should not be a determining factor.
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Re: Target retirement date fund okay for all accounts?

Post by triceratop »

pingo wrote:
triceratop wrote:To your knowledge, has there been any news from Vanguard on the topic of Admiral shares in the Target Date funds, since the question was raised to and acknowledged by Mr. Bogle ? This would address some investors' concern over their use.
A DIY Investor with Admiral Class funds will rebalance at difference times than Vanguard. The capriciousness of markets from day to day ensure that timing differences will dwarf any small cost advantage of an Admiral Class DIY portfolio (with an identical target allocation) versus Vanguard's Investor Share Target Retirement Funds. If one wins out over the other down the road, it will not be due to the difference in costs.

Even when comparing the Vanguard Target Retirement 2060, 2055, 2050 and 2045 funds (all of which have identical target allocations), I see performance differences of as much as a 4 basis points (0.4%) and 6 basis points (0.6%) over the 1 and 3 year periods, annualized respectively. (Only 3 of them have been around for at least 5 years and 2 for at least 10 years.)

In my employers target date funds, I see spreads as broad as 9 basis points (0.09%) over the last year, 6 basis points (0.6%) annualized over 3 and 5 years, and 11 basis points (0.11%) annualized since inception less than 10 years ago. The "winning" fund(s) are *not* consistent from period to period, either.

Vanguard does have some kind of institutional class versions of their Target funds @ ER 0.08%, give or take. I would welcome Admiral Target funds, of course. Until then, in the choice between using a Vanguard Target Fund or an equivalent DIY portfolio of Admiral Shares, the cost difference should not be a determining factor.
That may all be true, that the winning choice of Admiral vs. Target-date is going to result in differences larger than the ER, but unless you can show one way or the other which is expected to win, the ER difference certainly changes the expected (in the probabilistic sense) value of the results and is of interest for planning and evaluation purposes.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."
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Re: Target retirement date fund okay for all accounts?

Post by j0nnyg1984 »

I have all four of my parents IRA's in a vanguard TR index fund. No taxable account. My mom doesn't have the time to rebalance (or to even learn how) and I don't want the job.
pingo
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Re: Target retirement date fund okay for all accounts?

Post by pingo »

triceratop wrote:To your knowledge, has there been any news from Vanguard on the topic of Admiral shares in the Target Date funds, since the question was raised to and acknowledged by Mr. Bogle ? This would address some investors' concern over their use.
pingo wrote:A DIY Investor with Admiral Class funds will rebalance at difference times than Vanguard. The capriciousness of markets from day to day ensure that timing differences will dwarf any small cost advantage of an Admiral Class DIY portfolio (with an identical target allocation) versus Vanguard's Investor Share Target Retirement Funds. If one wins out over the other down the road, it will not be due to the difference in costs.

Even when comparing the Vanguard Target Retirement 2060, 2055, 2050 and 2045 funds (all of which have identical target allocations), I see performance differences of as much as a 4 basis points (0.4%) and 6 basis points (0.6%) over the 1 and 3 year periods, annualized respectively. (Only 3 of them have been around for at least 5 years and 2 for at least 10 years.)

In my employers target date funds, I see spreads as broad as 9 basis points (0.09%) over the last year, 6 basis points (0.6%) annualized over 3 and 5 years, and 11 basis points (0.11%) annualized since inception less than 10 years ago. The "winning" fund(s) are *not* consistent from period to period, either.

Vanguard does have some kind of institutional class versions of their Target funds @ ER 0.08%, give or take. I would welcome Admiral Target funds, of course. Until then, in the choice between using a Vanguard Target Fund or an equivalent DIY portfolio of Admiral Shares, the cost difference should not be a determining factor.
triceratop wrote:That may all be true, that the winning choice of Admiral vs. Target-date is going to result in differences larger than the ER, but unless you can show one way or the other which is expected to win, the ER difference certainly changes the expected (in the probabilistic sense) value of the results and is of interest for planning and evaluation purposes.
That also is also true. :D

I look at your statement as correct and as the principle of the matter, but in trying to be pragmatic I can't assign much importance to the tiny cost differences. At this level of cost savings, I think it's perfectly legit to give weight to the nicety of "hands-free" investing and the efficiency with with Vanguard manages the Target/LifeStrategy portfolios.

:thumbsup
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