low risk, low fee fund for older investor?

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albireo13
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low risk, low fee fund for older investor?

Post by albireo13 » Thu Oct 19, 2017 6:52 am

I'm 61yo, looking at retiring in 2 years.
I've been socking $$ away in my 401K. That's pretty much my total savings strategy.
Post tax savings are nil and I'm thinking I should develop a cash buffer, maybe invest in some low fee index funds.

Any advice? ... or just stay put and sock away at the 401K, given my age??

Thx

Johm221122
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Re: low risk, low fee fund for older investor?

Post by Johm221122 » Thu Oct 19, 2017 6:56 am

More information would be helpful

Asking portfolio question
viewtopic.php?t=6212
Are you maxing your 401 and your tax rate?

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nisiprius
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Re: low risk, low fee fund for older investor?

Post by nisiprius » Thu Oct 19, 2017 7:37 am

Fees are definitely worth looking at. They are what they care, you can do the math and calculate the money. Reducing expense ratios is (in my opinion) not life-transforming, and exercises that purport to show you that they are, by compounding out for twenty years, are somewhat misleading--like other exercises that purport to show you that just cutting out high-priced lattes could be the difference between a happy and a miserable requirement. But fees are a sure thing, and they are annual. 1% doesn't sound like much, but 1% out of your account every year adds up; also, with today's lowered expectations of returns, if e.g. a bond fund is only earning 2% or 3% per year (after fees), that means the fund company is taking a third or a quarter of your earnings.

Here is what you need to take the time to do. Take out your 401(k) statement. Look at each fund in it. You don't need to do this with perfect precision, you can leave out any tiny holdings, for example. Make a list, on paper or in a spreadsheet, of the fund's ticker symbol, its expense ratio, and the number of dollars your holding in the fund is worth. It doesn't need to be exact to the penny and you can even round the numbers if you like.

Important: get the expense ratio out of your plan literature, not by looking it up online, sometimes it can be different.

For each fund, calculate the number of dollars you are paying in expenses by multiplying the expense ratio by the number of dollars in the fund.

Calculate a total for the number of dollars in all of the funds (just take it from the statement if it's there) and the total number of dollars in expenses. (If there are any holdings for which you just can't find the information, i.e. it's a mystery, then just leave it out of both totals).

Fidelity Total Stock Market Fund, $110,000 * 0.09% = $99
Fidelity Diversified International Fund, $20,000 * 1.05% = $210
Fidelity U.S. Bond Index Fund, $50,000 * 0.14% = $70

Total funds, $180,000, total expenses, $379 (per year, of course)

Now divide the total expenses by the total value of the funds to get your effective overall expense ratio:
$379 / $180,000 = 0.21%

At that point, you need to apply your own judgement to decide whether any of this is worth taking action on, always remembering that just because you cut expenses you do not know whether or not that is going to increase your return, because the fluctuation and uncertainty of performance in funds like these is just hugely, hugely greater than expenses.

My personal judgement, if I were in this situation, is that 0.21% overall ain't bad. I might stay put. The analysis by dollars shows that the expenses of the Fidelity Diversified International Fund are by far the most important--they are over half of the total. What I would do might well depend on what's convenient in the 401(k). For example, if there were a different choice that seemed just as appropriate that had considerably lower cost--perhaps Fidelity Total International Index Fund, FTIPX, with an expense ratio of 0.10%--

Fidelity Total Stock Market Fund, $110,000 * 0.09% = $99
Fidelity Total International Stock Index Fund, $20,000 * 0.10% = $20
Fidelity U.S. Bond Index Fund, $50,000 * 0.14% = $70

Total funds, $180,000, total expenses, $189, overall $189 / $180,000 = 0.11%

So, on the one hand, in this hypothetical example you've saved $190/year and cut the expense ratio for your whole portfolio from 0.21% to 0.11%. On the other hand, how bad will you feel if you make the change and next year FDIVX outperforms FTIPX?

Also, to some extent "stay the course" means "just stick it out in whatever you've chosen and don't sweat the small stuff." No matter what you choose, there will always be times something else looks better and part of the trick is just to stay with something that's good enough and not revise and retune and retweak your portfolio every year.

There could be situations in which the choices within the 401(k) plan were so bad that one might consider contributing less to the 401(k) and investing the difference in a Roth IRA in order to get a better fund choice. In this particular hypothetical situation I don't think I would bother to do that.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

dbr
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Re: low risk, low fee fund for older investor?

Post by dbr » Thu Oct 19, 2017 7:55 am

albireo13 wrote:
Thu Oct 19, 2017 6:52 am
I'm 61yo, looking at retiring in 2 years.
I've been socking $$ away in my 401K. That's pretty much my total savings strategy.
Post tax savings are nil and I'm thinking I should develop a cash buffer, maybe invest in some low fee index funds.

Any advice? ... or just stay put and sock away at the 401K, given my age??

Thx
Important information that is missing is how much you intend to spend in retirement and what resources including savings, pensions, and Social Security you have to support that spending. Also missing is what costs your funds have and what intention you have for asset allocation across stocks and bonds. An asset allocation that is too low in risk, meaning bonds, may at the same time be too high in risk, meaning getting enough return to support what you want to spend.

Once you are withdrawing from assets there is no particular reason to build up a cash buffer. That was more important when you might have needed to deal with job loss or something and not have to invade retirement savings. There is still a tax advantage for most people to continue to add to the 401K.

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nisiprius
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Re: low risk, low fee fund for older investor?

Post by nisiprius » Thu Oct 19, 2017 7:59 am

Broadly speaking, for "ordinary" kinds of mutual funds such as you might find in your 401(k), risk and return depend mostly on the particular asset class the fund is holding. No mutual fund that is 100% stocks is going to be much less risky than any other 100% stocks fund, stocks are stocks, for a first cut ignore any nonsense you might read about high-dividend funds providing downside protection or carefully-construct portfolios that "diversify across risk factors" being less risky than a plain-old total stock market fund. Even if it is true, it is a connoisseur's detail.

If I order coffee it is going to have caffeine in it and I need to be careful to avoid caffeine in the evening. So usually I will order decaf. I don't take into account the fact that the coffee at Panera Bread has a different amount of caffeine in it than the coffee at Starbucks, I don't ask them how many milliliters of espresso is in an espresso shot, I don't ask them for a lab analysis of the amount of caffeine in the decaf.

My big levers for controlling caffeine are a) whether I order "coffee" or "decaf," and b) how many cups I drink.

Well, portfolios are like that.

In addition to other considerations like those mentioned by dbr, in order to decide on a "low risk, low fee" fund for you, you really need to calculate two numbers--NOT with high precision but you have to calculate them, and they have to be grand totals of every account you have that you consider to be "retirement savings." Here are the two numbers:

--Overall grand total expense ratio, which I showed you how to calculate in the previous posting.
--Overall percentage of your retirement savings that is in stocks (also called "equities.")

If, as you say, you only have one important retirement savings account, and it's your 401(k), it is very likely that they have printed a pie chart on the statement, or online somewhere, that shows the percentages in "stocks" (aka equities), "bonds" (aka fixed income), and "cash" (aka short-term reserves). If so, you can use the number from the pie chart.

The other thing you need to do is decide for yourself what level of risk you are comfortable with.

And if you are thinking of making a change, you need to know whether your 401(k) plan lets you transfer your mutual funds out of your 401(k) account and "roll it over" into a "rollover IRA" at some decent general-purpose brokerage.

In the interests of not being uselessly vague, I am now going to toss out a couple of numbers, but they are not advice and other people will have different opinions and you need to take responsibility for your own decisions.

If you are 61 and planning to retire in two years AND the total percentage of stocks (asset allocation pie chart on your statement) is 60% or more and you feel nervous, you should consider cutting it back. If it is 30% or less and you feel reasonably comfortable, you should consider staying put.

If the overall expense ratio of your total portfolio is well under 0.50%, and you are going to need to do something when you retire but you don't feel like fussing with it now if you don't need to... I don't think you need to. If it is somewhere in the range from 0.40% to 0.80% and you are considering making changes now, perhaps simplifying and cutting down on unnecessary funds, then you might look at the range of funds offered in your plan and see if you can cut expenses without doing anything drastic.

Oh, by the way: if you have more than five different mutual funds in your 401(k) account, then you've probably let yourself get tempted by the buffet table into trying a little of this and a bit of that, and it is probably not doing you any good at all.

That's the important stuff. Not the exact fund names, flavors, personal favorites, index versus active, etc. At Vanguard, the obvious "easy" choices would be the all-in-one funds like LifeStrategy Conservative Growth, LifeStrategy Income, Target Retirement 2020, Wellesley Income. They are all examples of low fee funds that are probably suitable for older investors, and they are low risk compared to funds that invest only in stocks, because they invest in mixtures of stocks and bonds.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

TJ89
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Re: low risk, low fee fund for older investor?

Post by TJ89 » Thu Oct 19, 2017 3:09 pm

I'm an older invester, older than you, in fact. To me the whole question boils down to, how much do I need?

I run the numbers and I need to take $40,000 a year out of my retirement funds, so I keep two years worth ($80,000) in VFMXX, the Vanguard federal Money Market Fund.

I keep seven years worth ($280,000) in VBTLX, the Vanguard Total Bond Market Index Fund.

All the rest (which is currently 18 years worth) is split between three funds. 60% goes in VTSAX, the Vanguard Total Stock Market Index Fund, 30% goes in VTIAX, the Vanguard Total International Stock Index Fund, and 10% goes in VGSLX, Vanguard REIT Index Fund.

Any dividends or return of capital generated by the funds are deposited in the Money Market Fund. Once a year I rebalance everything. So far the funds I am in have generated enough income over the course of the year that I have to take money out of the money market and invest in the three stock funds.

I've lived through enough market downturns that I live in fear of having to sell into a down market. I've never experienced a market correction during the withdrawal phase of investing, only during the accumulation. During the accumulation phase doing the right thing during a correction is easy, you just have to keep buying with both hands, but when you have to take money out you need options. I figure this plan will let me go a decade without having to sell any stock at all, which should see me through any foreseeable downturn.

JBTX
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Re: low risk, low fee fund for older investor?

Post by JBTX » Thu Oct 19, 2017 3:24 pm

albireo13 wrote:
Thu Oct 19, 2017 6:52 am
I'm 61yo, looking at retiring in 2 years.
I've been socking $$ away in my 401K. That's pretty much my total savings strategy.
Post tax savings are nil and I'm thinking I should develop a cash buffer, maybe invest in some low fee index funds.

Any advice? ... or just stay put and sock away at the 401K, given my age??

Thx
Yes a cash buffer or emergency fund would make sense, and maybe some taxable funds especially after you stop working

Investing in a Roth IRA may make sense but really depends on your financial situation and tax brackets. One good thing about a Roth is you can pull out principal penalty free if you really need to

You may be ok just staying in 401k but again a lot depends on your financial specifics. When you withdraw money you will pay taxes. How much you pay depends on how much you withdraw, any other income sources and eventually social security.

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