36-year-old -Is Target Retirement Fund for me?

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kccc
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36-year-old -Is Target Retirement Fund for me?

Post by kccc » Thu Jan 20, 2011 6:35 pm

I am a self employed, single, 36 year old female.
I have $73,000.00 in a savings account earning 1.25% interest rate. I have another 8,000.00 in a Roth IRA - Dodge and Cox International Fund. I also own a condo that I rent out, so the rent pays my mortgage. The mortgage rate is 3.88%.

I was thinking of putting money in a nonretirement account, so that it is there if I need to use it in 3 or 5 years. Should I put the majority of my money in a non-retirement account in Target Retirement 2025, so that my money is safer? Or should I buy the individual funds such as Total Stock Market Index Fund, Total International Stock Index fund, and Total Bond market index fund, so that I can determine how much money in each fund to have a safer investment?

Regarding IRA, Should I roll over my Roth IRA and do a Vanguard IRA Target Retirement 2040 and add money to that each year? Is a Roth IRA better than trad IRA?

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BL
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Post by BL » Thu Jan 20, 2011 7:05 pm

I don't believe any of your choices are "safe" and would not recommend them for money you might need in less than 5 years. Probably CDs or FDIC guaranteed savings accounts would be most appropriate (even though the rates seem pathetic!) or at most, short term bonds, which probably couldn't lose too much. This board has suggestions for banks that have better rates.

You might be able to set up a retirement plan for yourself so you can save in a pre-tax plan.

Roth is good unless you need to reduce your taxable income by using a regular IRA. Vanguard probably has lower cost funds for Roth.

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kccc
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Post by kccc » Thu Jan 20, 2011 7:13 pm

Most all my money would be invested for long-term. the only reason I would ever need the money is if I ever met someone and got married. Otherwise, as a single person, I would leave it in for long-term.

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BL
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Post by BL » Thu Jan 20, 2011 7:25 pm

I think you should read some of the books recommended in the Wiki such as Bogleheads Guide to Investing and maybe Smartest investment book you'll ever read. They should be available in the public library.

The 3 funds you mentioned sound good, but the bonds really belong in your IRA when possible. You need to figure out what Asset Allocation you want. The books may also help with that. Are you sure you won't need retirement money if you get married?

dbr
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Post by dbr » Thu Jan 20, 2011 7:31 pm

kccc wrote:Most all my money would be invested for long-term. the only reason I would ever need the money is if I ever met someone and got married. Otherwise, as a single person, I would leave it in for long-term.
What confused the conversation is that you started out saying "so that it is there if I need to use it in 3 or 5 years." BL's advice is totally appropriate for that consideration. You also twice used the language "so that my money is safer." Safety would mean a savings account and/or insured CD's.

At your age and that amount of assets, a first consideration is having an emergency fund so that a period of unemployment or other major set back you would not have to sell depressed assets or rob a tax deferred fund for money.

After you have taken care of that need, then I think it makes sense to start putting money in TSM and TISM in taxable and TB in your tax sheltered location, which is the Roth. One assumes you will continue to add money there, even if it is just added by transfer from your taxable assets. What are your bond choices in the Roth? Note that right now your tax rates may not be high enough to matter which investments go in what account, but later on it will matter.

You will need to give some thought to risk in investing. Stocks are risky. Bond funds are not as risky, but do not guarantee maintenance of dollar value. Cash investments like savings and CD's do not lose money but can lose value with inflation. You might not want to move beyond 60%-70% in stocks, but I think you need to look at some of the reading below to understand more about that decision. Some people might recommend less than that. I like the discussion on the subject in Larry Swedroe's books.

I would not be in a hurry but instead would start reading some of the excellent books in the library. The Bogleheads investing book, Larry Swedroe's books, Bernstein, and Rick Ferri's book on asset allocation are my recommendations.

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kccc
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Post by kccc » Thu Jan 20, 2011 8:08 pm

Yes, I just finished reading the Boglehead's Guide to Investing. That is where I learned about the Target Retirement fund, but when I called Vanguard, they told me that I can't put a large sum in a Roth IRA at one time. That is when I decided that maybe I needed a non retirement account to put most of my money in to get a better rate than a savings account, but where I can still take the money just in case something like getting married comes into my future. I just figured CD rates are so low in these times, and I would like to earn more interest on my money.

dbr
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Post by dbr » Thu Jan 20, 2011 8:12 pm

kccc wrote:Yes, I just finished reading the Boglehead's Guide to Investing. That is where I learned about the Target Retirement fund, but when I called Vanguard, they told me that I can't put a large sum in a Roth IRA at one time. That is when I decided that maybe I needed a non retirement account to put most of my money in to get a better rate than a savings account, but where I can still take the money just in case something like getting married comes into my future. I just figured CD rates are so low in these times, and I would like to earn more interest on my money.
The path you are contemplating is the common dilemma of all investors, or, if you will, the common opportunity of all investors. This is the trade off of risk and return. In short, to earn a greater return you have to take more risk. Therefore, if you want to proceed down that path, it is essential that you understand risk. Risk is a complicated enough concept that it is worth spending some time on the subject in books rather than trying a simplistic review here. I would go to the books and start focussing on the discussions about risk and return.

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wander
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Re: 36-year-old -Is Target Retirement Fund for me?

Post by wander » Fri Jan 21, 2011 7:21 pm

kccc wrote: I was thinking of putting money in a nonretirement account, so that it is there if I need to use it in 3 or 5 years. Should I put the majority of my money in a non-retirement account in Target Retirement 2025, so that my money is safer?
Why do you want to put money that you will need in 3 or 5 years (2011+3, 2011+5) in a fund that is designed for 2025?

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kccc
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Post by kccc » Fri Jan 21, 2011 9:46 pm

I would not need to use all of the money, just a portion of it.

I have been thinking now of doing this:
1. roll over my Roth IRA to a Vangard IRA - Target Retirement 2040.
2. put 25,000 in a nonretirement account, long-term -Target Retirement 2040.

I just don't know what to do with the rest of my money, about $45,000. CDs and savings accounts have low interest rates. Any ideas?

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Post by rr2 » Fri Jan 21, 2011 10:10 pm

kccc - What do you consider "safe"? What happens if you do need all or part of the money in 3-5 years and the 73k has dropped to 50k.

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kccc
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Post by kccc » Fri Jan 21, 2011 11:04 pm

Well, that's why I'm starting to changing my mind and instead of putting the whole 73,000 in, I am thinking of putting just 25,000 in the nonretirement account. I just don't know what to do with the rest of the money now. I would be happy with something that is a steady 4 or 5% interest rate.

dbr
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Post by dbr » Fri Jan 21, 2011 11:53 pm

kccc wrote:I would not need to use all of the money, just a portion of it.

I have been thinking now of doing this:
1. roll over my Roth IRA to a Vangard IRA - Target Retirement 2040.
2. put 25,000 in a nonretirement account, long-term -Target Retirement 2040.

I just don't know what to do with the rest of my money, about $45,000. CDs and savings accounts have low interest rates. Any ideas?
It's very hard to tell what you mean. Long term - Target Retirement 2040 would mean money in a taxable account that is meant for retirement. Long term and retirement are pretty much interchangeable terms in this context. Funds don't have to be in a retirement account like an IRA or a 401K to be for retirement. But anyway, we'll accept that as a strategy.

You want the $45K for possible short term use, and you want it to be safe meaning that when you want the money, you want the whole $45K to be there for sure. You also want to earn 4%-5% interest. The answer is that can't be done. It's just the luck of the draw that you can't get high nominal interest rates on safe investments right now. If you try, you will have to take risk that may or may not materialize and bite you.

Here is an example. You could buy the Vanguard long term corporate bond fund. It yields about 5.5% right now. It has a duration of about 12 years. If interest rates on those bonds went up 2 percentage points the value of that fund would drop 25%. The Vanguard intermediate treasury fund yields about 2% right now and has a duration of about 5 years. If interest rates went up 2 percentage points that fund would lose 10%. You could buy stock in Chimera Investment Corporation and earn 16.5% dividend. That company could go out of business and you could lose all your money. Total stock market lost about 50% of its value in 2008. You can buy CD's that provide somewhere between 1% and 2% interest, maybe better than that, and able for early redemption at a modest penalty. That is why the recommendation is for CD's here.

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kccc
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Post by kccc » Sat Jan 22, 2011 9:31 am

Thank you, you made things much clearer for me. That is exactly what I needed to know.
So, there is not anything that would be considered safe except for CDs.

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anthau
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Post by anthau » Sat Jan 22, 2011 9:53 am

kccc wrote:So, there is not anything that would be considered safe except for CDs.
CDs, money markets (with a caveat), savings accounts, savings bonds, and T-bills would all qualify as "under the mattress safe," imo.

You may find these three parts of the wiki of interest (pun intended): Money markets, treasury bonds, and emergency fund.
Best, | | Anth

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Post by pkcrafter » Sat Jan 22, 2011 10:55 am

kccc,

1. The most important thing you need to do is mentally separate long term savings/investing from short term. Commit the 25k (or whatever you decide) to your retirement funding and hold the rest for short/intermediate term.

2. You need to focus on retirement savings because if you are starting now with 25k, that is a pretty low total.

3. Are you sure you can handle an asset allocation of 90% stock? That is very high and many here would suggest a max of 75-80% stock. Be sure to do some reading on risk.

4. Have you looked into any retirement plans for individual self employed?


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

dbr
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Post by dbr » Sat Jan 22, 2011 11:45 am

anthau wrote:
kccc wrote:So, there is not anything that would be considered safe except for CDs.
CDs, money markets (with a caveat), savings accounts, savings bonds, and T-bills would all qualify as "under the mattress safe," imo.

You may find these three parts of the wiki of interest (pun intended): Money markets, treasury bonds, and emergency fund.
This is accurate. The reason CD's are popular in conversations around here is that they are an opportunity for small investors to make a little more return in an investment that is safe, but not perfectly liquid, usually has redemption penalties and is really not accessible to big money, which would drive the yield closer to money market rates.

A good example of safe savings bonds would be I-Bonds which offer minimal interest rates but are compensated for inflation, can be redeemed after holding for one year, cost you 3 months interest if redeemed before five years, and no tax is paid until redeemed. They can be held and earn interest and inflation for up to thirty years. The current fixed rate on I-bonds is 0.00%, but you will get the rate of inflation on top of that, which is around 1.5% right now.

Here is a curve of the current interest rates on Treasuries. T-bills are treasuries with maturities up to a year. You can see what the interest rates are. If you run the cursor around you can see what interest rates have been at other times:

http://stockcharts.com/freecharts/yieldcurve.html

You can see why people might take risk to go to longer maturities, and you can see why you just can't get interest right now on short term investments that are "safe." The longer term investments can fall in value when interest rates go up, in proportion to how long the term is.

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