Thoughts on Switching to Target Retirement Funds

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
oleblue
Posts: 131
Joined: Tue Oct 06, 2009 1:37 pm

Thoughts on Switching to Target Retirement Funds

Post by oleblue » Thu Jul 12, 2018 6:37 am

Hello all,

I'm debating switching my VG funds to a Target Retirement Funds and would really appreciate your thoughts on it. I've always managed my own investments and made an honest attempt to rebalance every year. I recently spoke to a fee only CFP to validate and get a birds eye view of my financial life. After speaking with me and hearing my concerns on rebalancing, he recommended that I go with VG TR funds.

I turn 36 next year and realize there are things I'd rather be doing than having to worry about rebalancing my portfolio. I retire in 4 years with Gov pension and may decide to travel for a while as light as possible. I'm sort of a minimalist I guess one would say. After a thorough deep dive in an attempt to simplify and cut the fat from my entire digital life, pictures, reference documents etc., I'm on to the investments and would like to try and simplify those as well.

Currently maxing out TSP and Roth and have money left to fund taxable accounts. All our funds are VG admiral funds and TSP. I realize the ER will be higher with the TR funds but I like the idea of the simplicity of it. I also read that TR funds are not good in taxable accounts, so I'm not sure what to put there. Any thoughts and advice would be much appreciated.

Here is what we have now and what I'm thinking it would look like.

His:
Taxable accounts $135K
Total International
Total Stock Market
VG Life Strategy fund
Undecided what to do with the taxable funds..

TSP $280K
C, S, and F
Switch from current to TSP TR 2050

SEP $12K
VG REITS
Switch from current to VG TR 2050

Roth $100K
Total Stock Market
Total International
Switch from current to VG TR 2050

Hers:
TSP $15K
C, S, and I
Switch from current to TSP TR 2050

Roth $25K
Total Stock Market
Switch from current to VG TR 2050

SEP $2K
VG Money Market
Switch from current to VG TR 2050

goblue100
Posts: 555
Joined: Sun Dec 01, 2013 10:31 am

Re: Thoughts on Switching to Target Retirement Funds

Post by goblue100 » Thu Jul 12, 2018 6:44 am

What overall asset mix do you want? With TRF's you sort of get what they give you. Does that match what you want? If it doesn't, then one way to adjust it would be to hold only
Total International
Total Stock Market
in taxable in percentages that help balance your desired AA vs. what you get from the TRFs.
Some people are immune to good advice. - Saul Goodman

BrooklynInvest
Posts: 109
Joined: Sun Jul 28, 2013 9:23 am

Re: Thoughts on Switching to Target Retirement Funds

Post by BrooklynInvest » Thu Jul 12, 2018 6:57 am

I did the same thing with my 401K.

I'm comfortable with equity risk so I picked a T-D close to expected retirement and allocated a small amount to an S&P fund "on the side." Could've used a faux retirement date farther out too. Swings and roundabouts.

User avatar
Cycle
Posts: 508
Joined: Sun May 28, 2017 7:57 pm
Location: Minneapolis, USA

Re: Thoughts on Switching to Target Retirement Funds

Post by Cycle » Thu Jul 12, 2018 7:14 am

My 401k recently automatically switched me to target funds since my investment selections went away. The expense ratio is .1, ($500/yr). For this account I save $400/yr by self balancing my 401k.

I'm not sure if I'm going to stay in target funds, but if I do I think I'll be more immune to market timing. My fear is that I will switch up my AA to be more bond heavy because the market can't possibly go any higher, as we have seen plenty of posts on recently.

I'm 35 fwiw, 920k in investments for two earners (750k in Target 2050 fund for DW and myself).

oleblue
Posts: 131
Joined: Tue Oct 06, 2009 1:37 pm

Re: Thoughts on Switching to Target Retirement Funds

Post by oleblue » Thu Jul 12, 2018 3:37 pm

goblue100 wrote:
Thu Jul 12, 2018 6:44 am
What overall asset mix do you want? With TRF's you sort of get what they give you. Does that match what you want? If it doesn't, then one way to adjust it would be to hold only
Total International
Total Stock Market
in taxable in percentages that help balance your desired AA vs. what you get from the TRFs.
I'm comfortable around 85-90/10-15 which is where I'm at now and that aligns with the TR 2050. Keeping it as simple as possible, what if I aligned the same funds I have in taxable now with the TR 2050 AA?

BrooklynInvest, I'm comfortable with the equity risk as well. The 2050 is a little further out that I will actually retire.

My overall expense rate now is at .11. Switching to VG TR funds, would put me at .15. The TSP would remain the same as it is now.

02nz
Posts: 434
Joined: Wed Feb 21, 2018 3:17 pm

Re: Thoughts on Switching to Target Retirement Funds

Post by 02nz » Thu Jul 12, 2018 4:16 pm

Since TSP funds all have the same ER, there's a significant difference in cost for about 260K of your portfolio (taxable and the two Roth IRAs). Going with VG Admiral shares (0.04%) would cost about $100 annually, while VG Target Retirement Funds (0.15% ER) would be just under $400. Only you can decide whether that roughly $300/year is worth it. I would say no, given the ease of rebalancing a three-fund portfolio. $300 every year would likely add up to five figures by the time you retire. A small portion of your portfolio, sure, but enough that I'd care about the difference.

To keep things simple I'd go all in on the three-fund portfolio OR all target date, and not mix the two. Get rid of LifeStrategy, too, if the capital gains are low. I would recommend something like this:

Taxable and Roths: Total Stock market

TSP: G fund
I recommend using the G fund for the entire fixed-income portion of your portfolio. No other bond funds. The G fund is unique in offering the returns of long-term treasuries and no interest-rate risk (what some call a "free lunch"). If you look at past returns, the F fund has sometimes outperformed it, but that was in large part due to falling interest rates. For cushioning volatility, it doesn't get better than the G fund.

I'd recommend filling any TSP space after the G fund with the I fund. The advantage is the its expense ratio (around 0.03%, like other TSP funds), which is much lower than Total International Admiral (0.11%, whereas Admiral shares of domestic index funds are only 0.04). The downside is that right now the I fund only covers developed markets, so no emerging markets exposure. This will change within the next year or so, and then the I fund will match Total International. Until the change takes effect, you can buy an emerging markets fund (e.g., VEMAX) in your Roth to compensate, if getting the exposure is important to you.

Any more space in TSP, fill with C and S, 80:20 ratio if you want to match TSM.

EDIT TO ADD: You may already have thought of this, but if you're looking at a potential period of low/no income, that would be a perfect time to harvest capital gains at 0% LTCG tax rate and/or do Roth conversions at low income tax rates. So hold off taking capital gains until then, and do all traditional contributions to TSP, not Roth.

LinusP
Posts: 21
Joined: Fri May 18, 2018 10:29 am

Re: Thoughts on Switching to Target Retirement Funds

Post by LinusP » Thu Jul 12, 2018 6:03 pm

02nz wrote:
Thu Jul 12, 2018 4:16 pm
I'd recommend filling any TSP space after the G fund with the I fund. The advantage is the its expense ratio (around 0.03%, like other TSP funds), which is much lower than Total International Admiral (0.11%, whereas Admiral shares of domestic index funds are only 0.04).
Thanks for mentioning this - I've been trying to figure out what else to hold in TSP after my G allocation, and the generally-higher expense ratios on international funds are a good reason to prioritize the I fund.

oleblue
Posts: 131
Joined: Tue Oct 06, 2009 1:37 pm

Re: Thoughts on Switching to Target Retirement Funds

Post by oleblue » Thu Jul 12, 2018 10:25 pm

EDIT TO ADD: You may already have thought of this, but if you're looking at a potential period of low/no income, that would be a perfect time to harvest capital gains at 0% LTCG tax rate and/or do Roth conversions at low income tax rates. So hold off taking capital gains until then, and do all traditional contributions to TSP, not Roth.
Thanks for mentioning this. I will be semi retiring in about 4 years. That will put me in a lower tax bracket.

If I'm processing this correctly, your basically recommending, that I use TSM for Roth, SEP, and Taxable accounts and get international and bond exposure within the TSP.


Saying I were to need money from my taxable accounts in 5 years, wouldn't the flexibility of 3 fund portfolio be better in taxable so that in a down market I could liquidate fixed income funds and in an up market equity funds?

I still like the idea of the target funds especially in TSP where they are costing me no more in expenses that the funds I have now. Any other thoughts?

LinusP
Posts: 21
Joined: Fri May 18, 2018 10:29 am

Re: Thoughts on Switching to Target Retirement Funds

Post by LinusP » Thu Jul 12, 2018 11:07 pm

oleblue wrote:
Thu Jul 12, 2018 10:25 pm
02nz wrote:
Thu Jul 12, 2018 4:16 pm
EDIT TO ADD: You may already have thought of this, but if you're looking at a potential period of low/no income, that would be a perfect time to harvest capital gains at 0% LTCG tax rate and/or do Roth conversions at low income tax rates. So hold off taking capital gains until then, and do all traditional contributions to TSP, not Roth.
Thanks for mentioning this. I will be semi retiring in about 4 years. That will put me in a lower tax bracket.

If I'm processing this correctly, your basically recommending, that I use TSM for Roth, SEP, and Taxable accounts and get international and bond exposure within the TSP.

Saying I were to need money from my taxable accounts in 5 years, wouldn't the flexibility of 3 fund portfolio be better in taxable so that in a down market I could liquidate fixed income funds and in an up market equity funds?
Not so much so you could liquidate stocks or bonds - that would involve big changes to your asset allocation and constitute market timing. But besides tax gain harvesting, which is what 02nz suggested you do when you sell your LifeStrategy fund, keeping funds like Total Stock Market and Total International Stock in taxable give you opportunities to tax loss harvest later, when your income could be higher.

I'm likely to be tax gain harvesting next year and the year after - you might want to check out this thread if you want more details on that: Moving taxable investments...tax-free?

02nz
Posts: 434
Joined: Wed Feb 21, 2018 3:17 pm

Re: Thoughts on Switching to Target Retirement Funds

Post by 02nz » Fri Jul 13, 2018 12:02 am

oleblue wrote:
Thu Jul 12, 2018 10:25 pm
If I'm processing this correctly, your basically recommending, that I use TSM for Roth, SEP, and Taxable accounts and get international and bond exposure within the TSP.
Correct - That would be the lowest-cost way to go and takes full advantage of the TSP G fund's unique properties.
oleblue wrote:
Thu Jul 12, 2018 10:25 pm
Saying I were to need money from my taxable accounts in 5 years, wouldn't the flexibility of 3 fund portfolio be better in taxable so that in a down market I could liquidate fixed income funds and in an up market equity funds?
Most here would recommend (as would I) keeping money you expect to access within five years or so, e.g. down payment on a home, in high-yield savings, money market, CDs, or similarly stable instrument, separate from your retirement asset allocation.

If you have only stocks in taxable and for whatever reason need to access those funds in a down market, you can sell stocks in taxable and shift an equivalent amount from bonds to stocks elsewhere (e.g., in TSP), so that in effect you liquidate bonds not stocks. In this situation you'd also benefit from the tax loss on the sale of stocks*, which you likely would not have had you sold bonds in taxable. In other words not having bonds in taxable doesn't mean you're stuck liquidating stocks in a down market; the key is to maintain a "whole-of-portfolio" view.

All that aside, nothing wrong with the target funds, if you can live with the higher cost (except in TSP). I can certainly see their advantages for many investors, as they make it easier to "set it and forget it" and "stay the course."

(* You'd have to watch out for the wash sale rule, which could apply if you buy substantially identical securities in TSP/IRA/401k within 30 days after selling them in taxable. But the TSP C fund is not substantially identical to TSM; it is substantially identical to any S&P 500 index fund.)

User avatar
luminous
Posts: 74
Joined: Sat Dec 30, 2017 10:28 pm

Re: Thoughts on Switching to Target Retirement Funds

Post by luminous » Fri Jul 13, 2018 12:32 am

I also have a mix of accounts including taxable, TSP, Roth, and 401ks. The total is just above $1M. I have opted for target date funds in the retirement accounts and Vanguard Total International plus Vanguard Total Stock Market in the taxable account. Target allocation is 45/25/30 US stock/international stock/bonds. I'm lucky that the largest of my 401ks I have access to a very low fee (.05%) version of the Vanguard target date funds.

I currently pay an effective 0.07% or $690.38/year. If I moved to a 3 fund approach with manual rebalancing I'd pay 0.05% or $484.72/year. I'd personally rather pay the extra $206/year and never be tempted to tinker or time anything with my rebalancing. I sleep very well at night with my choice.
45/25/30 US stock/international stock/bonds. Target date funds. Hope to semi-retire in 2026.

oleblue
Posts: 131
Joined: Tue Oct 06, 2009 1:37 pm

Re: Thoughts on Switching to Target Retirement Funds

Post by oleblue » Sat Jul 14, 2018 3:00 am

Not so much so you could liquidate stocks or bonds - that would involve big changes to your asset allocation and constitute market timing. But besides tax gain harvesting, which is what 02nz suggested you do when you sell your LifeStrategy fund, keeping funds like Total Stock Market and Total International Stock in taxable give you opportunities to tax loss harvest later, when your income could be higher.
Got it, ok yeah that makes sense. Thanks for clarifying that.
If you have only stocks in taxable and for whatever reason need to access those funds in a down market, you can sell stocks in taxable and shift an equivalent amount from bonds to stocks elsewhere (e.g., in TSP), so that in effect you liquidate bonds not stocks. In this situation you'd also benefit from the tax loss on the sale of stocks*, which you likely would not have had you sold bonds in taxable. In other words not having bonds in taxable doesn't mean you're stuck liquidating stocks in a down market; the key is to maintain a "whole-of-portfolio" view.
If I'm understanding this right, essentially if I sold the stocks from taxable in a down market, I could sell the bonds "high" in TSP and buy stocks "low" in TSP effectively liquidating the bonds? I will keep my bonds out of taxable, I'm thinking 80/20 total stock market and total international in taxable.
All that aside, nothing wrong with the target funds, if you can live with the higher cost (except in TSP). I can certainly see their advantages for many investors, as they make it easier to "set it and forget it" and "stay the course."
I'm comfortable with the higher costs for the set it and forget it approach. The peace of mind for me would be worth it knowing that I didn't have to rebalance and tinker with anything other than maybe the taxable account if it got too far out of wack.
I also have a mix of accounts including taxable, TSP, Roth, and 401ks. The total is just above $1M. I have opted for target date funds in the retirement accounts and Vanguard Total International plus Vanguard Total Stock Market in the taxable account. Target allocation is 45/25/30 US stock/international stock/bonds. I'm lucky that the largest of my 401ks I have access to a very low fee (.05%) version of the Vanguard target date funds.

I currently pay an effective 0.07% or $690.38/year. If I moved to a 3 fund approach with manual rebalancing I'd pay 0.05% or $484.72/year. I'd personally rather pay the extra $206/year and never be tempted to tinker or time anything with my rebalancing. I sleep very well at night with my choice.
I like your setup, seems simple enough but still effective. $206 a year would be well worth not having to tinker with anything to me. I would be in a similar situation as you, the majority of my portfolio is in my TSP with very low fees.

Right now I'm seeing more pros than cons towards switching to the Target Funds.

Thinking of this simple setup. The TSP 2050 is more conservative at 82/18 AA and VG 2050 is 90/10. Thinking out loud here but wouldn't I want the AA the same on both the TSP and VG funds? The VG 2040 is the closest with 85/15.

Roth and SEP for mine and hers- VG TR 2050

401K (TSP) mine and hers- Lifecycle 2050

Taxable- 80 TSM/20 Total International

fujiters
Posts: 90
Joined: Tue Mar 06, 2018 2:17 pm

Re: Thoughts on Switching to Target Retirement Funds

Post by fujiters » Sat Jul 14, 2018 8:12 am

02nz wrote:
Thu Jul 12, 2018 4:16 pm
The advantage is the its expense ratio (around 0.03%, like other TSP funds), which is much lower than Total International Admiral (0.11%, whereas Admiral shares of domestic index funds are only 0.04).
I don't think that's accurate. See https://www.tsp.gov/InvestmentFunds/Fun ... Ratio.html. The footnote states that "Fees associated with securities lending are not included in 2017 administrative expenses. Consistent with standard practice in the industry, they are charged in addition to administrative expenses. Other expenses are disclosed in the financial statements and will be available in the April 2018 Highlights." If you open the linked Highlights newsletter you'll see there are different fees for each fund. I fund has a total expense of 0.042%. It's still a great deal, but it's worth noting there are "Other Expenses" for the TSP funds that you have to look in the Highlights newsletter to see.
“The purpose of the margin of safety is to render the forecast unnecessary.” -Benjamin Graham

User avatar
luminous
Posts: 74
Joined: Sat Dec 30, 2017 10:28 pm

Re: Thoughts on Switching to Target Retirement Funds

Post by luminous » Sat Jul 14, 2018 8:23 am

oleblue wrote:
Sat Jul 14, 2018 3:00 am
Thinking of this simple setup. The TSP 2050 is more conservative at 82/18 AA and VG 2050 is 90/10. Thinking out loud here but wouldn't I want the AA the same on both the TSP and VG funds? The VG 2040 is the closest with 85/15.

Roth and SEP for mine and hers- VG TR 2050

401K (TSP) mine and hers- Lifecycle 2050

Taxable- 80 TSM/20 Total International
Yup, I have Vanguard TD 2030 in most accounts but TSP 2040 is a closer match for my target asset allocation.
45/25/30 US stock/international stock/bonds. Target date funds. Hope to semi-retire in 2026.

jalbert
Posts: 3235
Joined: Fri Apr 10, 2015 12:29 am

Re: Thoughts on Switching to Target Retirement Funds

Post by jalbert » Sun Jul 15, 2018 3:05 am

If you won’t be working, I’m not sure a glide path is appropriate. You might move the LifeStrategy fund in taxable space to the stock index funds if the taxes are manageable, and move everything else to LifeStrategy Moderate Allocation.

One concern is if you won’t be working, you may be dealing with 50 or years of inflation compounding. Is your Federal pension COLA’d?
Index fund investor since 1987.

Post Reply