When to transition away from Target Date fund

[Fidelity1977]

1st time posting.

43 years old. Portfolio finally reached a million. Everything is in tax sheltered within a Fidelity target date index fund. Should I now transition to a 3 fund to save on costs or stick with what has worked. I like the idea of not worrying about rebalancing or the temptation to market time or tilt with the target date fund. I also understand with the larger balance that the costs are staring to add up. Not sure which path forward would be best?

[BarbBrooklyn]

At what age do you plan to retire?

I found it useful to separate my funds out of the TD fund about 3 years before retirement and gradually get to the AA that I knew I wanted as I glided into retirement.

I knew that I wanted to dump the International stuff and i wanted a different balance of equities and bonds thatn the TD fund offered in large part because I had other retirement funds that were inveated in a guaranteed fixed instrument.

I think you first need to figure out where you want to be in terms of AA, by what date and work back from there.

[yules]

1st time posting.

43 years old. Portfolio finally reached a million. Everything is in tax sheltered within a Fidelity target date index fund. Should I now transition to a 3 fund to save on costs or stick with what has worked. I like the idea of not worrying about rebalancing or the temptation to market time or tilt with the target date fund. I also understand with the larger balance that the costs are staring to add up. Not sure which path forward would be best?

Congratulations on the money. I would say to choose funds based on your asset allocation. Does the target date fund meet your AA needs? If so, and the fact that it stops you from market timing or tilting, then stay with it and consider whatever extra costs (I can’t think they are tremendous at Fidelity) to be the fee to stop you from temptation.

But if the target fund does not meet your AA, then who cares “what has worked,” because it’s not appropriate for you, and you should transition to somethIng else (maybe 3 fund, Mays another more/less aggressive target fund) ASAP.

Yules

[reln]

1st time posting.

43 years old. Portfolio finally reached a million. Everything is in tax sheltered within a Fidelity target date index fund. Should I now transition to a 3 fund to save on costs or stick with what has worked. I like the idea of not worrying about rebalancing or the temptation to market time or tilt with the target date fund. I also understand with the larger balance that the costs are staring to add up. Not sure which path forward would be best?

The cost of target date vs 3 fund are small compared to the cost of screwing up on your own.

[jason2459]

1st time posting.

43 years old. Portfolio finally reached a million. Everything is in tax sheltered within a Fidelity target date index fund. Should I now transition to a 3 fund to save on costs or stick with what has worked. I like the idea of not worrying about rebalancing or the temptation to market time or tilt with the target date fund. I also understand with the larger balance that the costs are staring to add up. Not sure which path forward would be best?

What is the cost of the target date fund And if you could list out what other options do you have and their cost. What asset allocation are you looking for? The more details you provide the more help you will get. There's a sticky up here somewhere with a basic template.

[jason2459]

Here this will help get more answers the more you can answer. viewtopic.php?f=1&t=6212

[Fidelity1977]

Expense ratio is .12

Thinking of retiring around 60-65

Thanks for everyone’s input. Really appreciate it.

[Watty]

When to transition away from Target Date fund

When you get close to retirement then some of your short term retirement goals may need a different asset allocation than the target date fund.

I retired when I was 58 so I knew that my expenses would be higher between then and when I was able to get on Medicare and start Social Security. At that point I knew that money would be needed in the next 5-7 years so that part of my portfolio would need a less aggressive asset allocation than the target date fund that I was invest in.

You might want to start planning for this when you are maybe five years from retirement.

[Katietsu]

It sounds like you have everything in one place with one fund that meets your needs at a low cost. If so, then it sounds that there is no reason to change.

[rkhusky]

Expense ratio is .12

Fidelity has ER=0 funds, but they are likely different than what is in your target date fund. So, there would be some risk in under-performing your target date funds by more than 0.12%. If you go with non-zero funds, you will probably pay about 0.02%-0.04% for a 3-fund portfolio, so a net of about 0.1%. (Note that the Fidelity Freedom Index funds also have more than a total bond fund, they have long and short term bonds and add TIPS as you get closer to retirement)

With $1M, you are paying about $1K/yr for the convenience of not having to rebalance or manage the glide path. Is that worth it to you? And, there is no reason that you would have to change anything in retirement, if you are still happy with the asset allocation.

[vineviz]

It sounds like you have everything in one place with one fund that meets your needs at a low cost. If so, then it sounds that there is no reason to change.

I agree.

An ER of 0.12% with a target date fund is so low that it's almost certain that transitioning away will cost most investors more due to behavioral mistakes than they could possibly save in expenses.

[Doom&Gloom]

It sounds like you have everything in one place with one fund that meets your needs at a low cost. If so, then it sounds that there is no reason to change.

I agree.

An ER of 0.12% with a target date fund is so low that it's almost certain that transitioning away will cost most investors more due to behavioral mistakes than they could possibly save in expenses.

+2

Just ensure that the target fund date you select will meet your AA wishes.

[RadAudit]

I transitioned my DW out of a TDF sometime after retirement when the projected AA was trending too quickly toward 30 / 70. I thought that may be a little too conservative to help provide her the funds she might need in retirement.

I transitioned from DIY to two LifeStrategy funds when my DW informed me that rebalancing four funds was too complicated.

YMMV

[Fidelity1977]

Thanks for all of the replies. I am strongly leaning toward just staying the course and if it is not broken why fix it. I know I could save some money with the Zero expense ratio 3 fund setup. For some reason with the target date I know it is being rebalanced and following on a glide path and I honestly am never tempted to make a change. With the 3 fund I just don’t trust myself behaviorally. Right now I might be tempted to increase my bond holdings until a vaccine arrives, US multiples look richer than international, Asia seems to be coping with the virus much better than domestically and so on. With the TD fund I really just add to it and don’t think about these things.

[Sandtrap]

Suggest reading “Ages of the Investor: Life Cycle Investing” by Bernstein.

j

[abuss368]

It sounds like you have everything in one place with one fund that meets your needs at a low cost. If so, then it sounds that there is no reason to change.

Excellent advice and in this example I would stay with the target fund.

Keep investing simple.

[sergeant]

I concur with those who say to stay in the TD fund. The simplification and expert management is worth the small expense.

[tennisplyr]

Retired here 9 years, have some target funds and some slice and dice. One of the minor nuisances for the target funds is you cannot withdraw from or add to a specific asset class, it's all one...not a big deal.

[MathIsMyWayr]

Retired here 9 years, have some target funds and some slice and dice. One of the minor nuisances for the target funds is you cannot withdraw from or add to a specific asset class, it's all one...not a big deal.

If you withdraw from a specific fund, e.g., a bond fund in a down market, and rebalance back to your desired AA immediately, how is it different from withdrawing from all the funds proportionally to their individual balances?

[Lastrun]

1st time posting.

43 years old. Portfolio finally reached a million.

Ask this question again in 10 years or 2 years before you plan to retire. For now I would stick with the target date fund.

[Dottie57]

1st time posting.

43 years old. Portfolio finally reached a million. Everything is in tax sheltered within a Fidelity target date index fund. Should I now transition to a 3 fund to save on costs or stick with what has worked. I like the idea of not worrying about rebalancing or the temptation to market time or tilt with the target date fund. I also understand with the larger balance that the costs are staring to add up. Not sure which path forward would be best?

The cost of target date vs 3 fund are small compared to the cost of screwing up on your own.

If there had been a low cost target date fund using index funds in my 401k I would have gone with that and not changed. The glide path is a nice feature. Keep the TDF.

[retiredjg]

This method has worked for you long enough to accumulate $1 million dollars. You like it.

Yes, you are paying for the service and convenience, but it works and you like it.

Why give that up? Consider the extra cost an expense for the service you are receiving. It is also a little insurance against making behavioral mistakes on your own - which can be very costly.

[djmbob]

If you withdraw from a specific fund, e.g., a bond fund in a down market, and rebalance back to your desired AA immediately, how is it different from withdrawing from all the funds proportionally to their individual balances?

Thank you, MathIsMyWayr, this really has an impact on me! Always held the position that I wanted to be able to withdraw from the higher performing fund when it was time to make a WD (haven't started withdrawals yet), so I stayed with a four-fund approach for many years, but I often fell into behavioral mis-steps when rebalancing due to market changes.

Great food for thought!

Cheers,
Ray

[dcabler]

1st time posting.

43 years old. Portfolio finally reached a million. Everything is in tax sheltered within a Fidelity target date index fund. Should I now transition to a 3 fund to save on costs or stick with what has worked. I like the idea of not worrying about rebalancing or the temptation to market time or tilt with the target date fund. I also understand with the larger balance that the costs are staring to add up. Not sure which path forward would be best?

What is the AA when your target date fund hits its target date? Or is it a "through" type of fund where even after the target date, the AA continues to change? More importantly what do you want your AA to be, both now and in the future and is your target date fund going to do that for you? If you like a fixed-allocation-now-and-forevermore you can certainly roll your own with a 3 fund or any other myriad AA's or you could buy one of many fixed-allocation funds and stay handsoff. Lots of options....

[Taylor Larimore]

1st time posting.

43 years old. Portfolio finally reached a million. Everything is in tax sheltered within a Fidelity target date index fund. Should I now transition to a 3 fund to save on costs or stick with what has worked. I like the idea of not worrying about rebalancing or the temptation to market time or tilt with the target date fund. I also understand with the larger balance that the costs are staring to add up. Not sure which path forward would be best?

Fidelity1977:

Based on the limited information you provided, and assuming all your investments are in tax-sheltered accounts, I would continue to invest in the Fidelity target date fund which has served you well.

Target date funds are tax-inefficient and do not belong in taxable accounts. If this is your case, consider this Three-Fund Portfolio which allows you to place tax-inefficient funds in your tax-sheltered accounts, and your tax-efficient funds in your taxable account.

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: "Mutual funds routinely ignore taxes when they present their performance, but investors cannot ignore taxes."

[Actin]

The TDFs are garbage and you shouldn't be buying them at all. There is zero upside to them compared to a standard three fund. It's a junk product that Vanguard pushes to make money in fees for something you can do yourself in ten minutes once a year.

[bck63]

The TDFs are garbage and you shouldn't be buying them at all. There is zero upside to them compared to a standard three fund. It's a junk product that Vanguard pushes to make money in fees for something you can do yourself in ten minutes once a year.

The data disagrees with you.

[inbox788]

Thanks for all of the replies. I am strongly leaning toward just staying the course and if it is not broken why fix it. I know I could save some money with the Zero expense ratio 3 fund setup. For some reason with the target date I know it is being rebalanced and following on a glide path and I honestly am never tempted to make a change. With the 3 fund I just don’t trust myself behaviorally. Right now I might be tempted to increase my bond holdings until a vaccine arrives, US multiples look richer than international, Asia seems to be coping with the virus much better than domestically and so on. With the TD fund I really just add to it and don’t think about these things.

Why transition? Lower fees is a small factor. If some of this is in a taxable account or has taxable consequences, optimizing tax location may be a reason to switch out, but it's fine keeping things simple.

[Horton]

The TDFs are garbage and you shouldn't be buying them at all. There is zero upside to them compared to a standard three fund. It's a junk product that Vanguard pushes to make money in fees for something you can do yourself in ten minutes once a year.

The extra few basis points in fees are meaningless in the grand scheme of things. The automated rebalancing alone paid for the extra fees in March 2020.

[Xrayman69]

1st time posting.

43 years old. Portfolio finally reached a million. Everything is in tax sheltered within a Fidelity target date index fund. Should I now transition to a 3 fund to save on costs or stick with what has worked. I like the idea of not worrying about rebalancing or the temptation to market time or tilt with the target date fund. I also understand with the larger balance that the costs are staring to add up. Not sure which path forward would be best?

The cost of target date vs 3 fund are small compared to the cost of screwing up on your own.

+1

[ruralavalon]

Congratulations on a one million dollar portfolio at age 43 .

1st time posting.

43 years old. Portfolio finally reached a million. Everything is in tax sheltered within a Fidelity target date index fund. Should I now transition to a 3 fund to save on costs or stick with what has worked. I like the idea of not worrying about rebalancing or the temptation to market time or tilt with the target date fund. I also understand with the larger balance that the costs are staring to add up. Not sure which path forward would be best?

When you add a taxable brokerage account, and wish to use tax-efficient fund placement.

Or you have decided that you wish a substantially different asset allocation than exists in the target date funds available to use.

Or there is a substantial difference in the expense ratios. Some target date funds have pretty low expense ratios, others not. Don't switch just for a small difference in expense ratios.

[tibbitts]

The TDFs are garbage and you shouldn't be buying them at all. There is zero upside to them compared to a standard three fund. It's a junk product that Vanguard pushes to make money in fees for something you can do yourself in ten minutes once a year.

Most Vanguard Target funds require a four-fund combination to simulate. The primary upside is that you won't be tempted to tweak the allocation between asset classes, or forget to adjust it with age, assuming you want to. Not everyone pays as much attention to investments with regard to rebalancing, etc. as Bogleheads typically do.

[ruralavalon]

The TDFs are garbage and you shouldn't be buying them at all. There is zero upside to them compared to a standard three fund. It's a junk product that Vanguard pushes to make money in fees for something you can do yourself in ten minutes once a year.

Target Date Funds (TDFs) are neither "garbage" nor "junk". Target Date Funds seem to have insulated investors from behavioral mistakes, and so have given better investor returns. Morningstar (8/15/2019) "Mind the Gap 2019", link.

The difference in investor returns has been around 0.77% annualized. So TDFs have had a significant upside.

[Taylor Larimore]

1st time posting.

43 years old. Portfolio finally reached a million. Everything is in tax sheltered within a Fidelity target date index fund. Should I now transition to a 3 fund to save on costs or stick with what has worked. I like the idea of not worrying about rebalancing or the temptation to market time or tilt with the target date fund. I also understand with the larger balance that the costs are staring to add up. Not sure which path forward would be best?

Fidelity 1977:

It appears that your Fidelity target date fund has worked well for you. The simplicity of T.D funds is even better as we get older.

Stay the course.

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: "We ignore the real diamonds of simplicity, seeking instead the illusory rhinestones of complexity."

[abuss368]

Stay the course.

Best wishes.
Taylor

Mr. Bogle said this advice to investors thousands of times! We would be wise to consider and follow.

Best.
Tony

[Charon]

If you go with non-zero funds, you will probably pay about 0.02%-0.04% for a 3-fund portfolio, so a net of about 0.1%.

The costs do not add, because each cost is charged only on the money in each fund.

That said, I firmly agree with you and most on this thread that sticking with the target date is the way to go (if the AA is good for you). I know I'm my own worst enemy, and behavioral losses can easily swamp any small gains from other approaches.