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Nothing, as long as the cost of that American Beacon fund is reasonable. You have well-thought-out reasons for selecting the funds you've chosen. Just remember you'll need to rebalance once or twice a year, and reconsider overall asset allocation about once a decade; it's not a "set and forget" portfolio like the target date fund.
Nothing wrong with using C/D if you ask the right people!
If you want it easy - then make it easy and be done with it. Get a Fidelity retirement date fund (example, Freedom 2040, and be done with it. They will automatically re-balance your portfolio. My wife has this one, she has no interest in following the markets.
On the other hand if you're willing to put some effort into it you should be able to do a bit better. I recommended PCN as the base for your IRA. I bought it in December and it's already up 5% and that doesn't include the dividends I've picked up as well. As I do think the markets are overvalued, and the political situation is muddled --- I would also put 20% of your IRA into something that protects you to the downside. My personal favorite is HDGE. Check it out. The markets simply do not go up forever. And there's no magic portfolio out there that entails no risk. They don't exist!
Our Fidelity account has the target retirement fund and I'm comfortable leaving that way... except for whatever reason he's got two different dates... I need to consolidated them. That's it, it's good to go!
The 401k I'm remixing is in Vanguard (as are our IRAs) and I don't have any of those options you mentioned. Also I might be pretty uneducated still, but I think the options I've got outside of the Vanguard target retirement funds in there are pretty good. Fantastic actually, in terms of expense ratios and ratings. That's why I'm willing to get more creative.
the issue with these target funds is not everyone has the same investment goals and pucker factor . many retain high equity allocations right through the early stages of l retirement . some at retirement age are still 60% or more in equity which today can be very very volatile , far more then many retirees have a stomach for.
when i was on the 401k committee at work target date funds were responsible for more of our newbees bailing out and staying out because the 90-100% equity's the funds had them at because they were young scared the crap out of them in 2008 .
I was surprised to see such "aggressive" stocks to bonds ratio in the target funds, but since we have two 401ks I have two opportunities to experiment.
I will leave our Fidelity account with the target fund, but I'm going to manage the one in Vanguard.
After a little discussion here I think I'm comfortable with my choices... I will simply move 1% of stock index to bond index every year in his Vanguard 401k... easy enough.
One last question.. this is more about the mechanics of getting this done:
I have never changed my allocations inside either a 401k or an IRA. When I buy and sell (or is it exchange???) in these accounts will I see taxes on the transaction show up on my 2016 tax return? I told my husband we won't because they're tax sheltered.. they're deferred until we take the money out (401k) or not at all (roth 401k and 2 roth IRAs), but he said, "okay, but what about the transaction itself?" Are we going to be taxed on the transaction and not the earnings" and I'm like, wha-whaa?
Anyway, I've yet to do this and I don't really know. Can anyone tell me if or how my changes in the 401k and IRA could affect my taxes next year?
I was actually thinking about this.... if it's in a 401k then I(we) really don't intend to withdraw from it for over 30 years. If we were talking about a taxable account then it would make more sense, or even an IRA, but not a 401k, especially since we're in a position to have many other sources of cash and income besides a 401k if an unfortunate drastic financial blow should arise. I'll give this more thought.
Thank you for mentioning that.
I had the same thought about bonds but I think somebody in another forum said LTL beats S&p 500, same with REITs. I also read the book by Janet Quinn Bryant, how to make your money last, retirement guide, and she wrote something about bond funds would also get more income if interest rate rises. In the past I only stick to holding bonds and wait for it to mature. Interesting that also what I've learned from Janet Quinn Bryant on her previous books. So check out the book and do some research for your understanding.
VT-Stock Market Index FIS: 53.1%
VT-International Stock Index FIS: 35.4%
VT-Bond Market II Index FIS: 8.1%
VT-International Bond Index FIS: 3.4%
What surprises me is that people in this age group are around 40 years old already and yet bonds are still under 15%... anyone???
While I am considering this fund for its Bogletastic simplicity, I am game for a little more complexity, so I've picked the following and prospective allocation percentages:
Okay, so, what am I doing wrong?
Here are my comments:
- At 40 years old, I would not own any bonds. I did not buy any until I was 55 or so. But while in the accumulation phase of investing, their main purpose is comfort, so you should own what makes you feel better, not what someone tells you. I know lots of people who are retired and do not own any bonds.
- I am not sure why International is being pushed so aggressively. 35% seems high to me. Currency volatility adds to the inherent volatility of international stocks to make the risk-adjusted return way below that of US equities. And they are well correlated to US equities giving them less benefit as a diversifier. The cynical side of me says Vanguard and Fidelity are pushing international because domestic index funds are saturated.
- I am a boglehead pretty much but like you I wanted more complexity. Well, after a few years of that I decided it really has not been worth it and I have been trying to simplify things. After a while you ask yourself if all that complexity has really paid off; have you done better than just investing in the total stock market? I don't really have any comments on your exact choices though.
I was surprised to see such "aggressive" stocks to bonds ratio in the target funds, but since we have two 401ks I have two opportunities to experiment.
I will leave our Fidelity account with the target fund, but I'm going to manage the one in Vanguard.
After a little discussion here I think I'm comfortable with my choices... I will simply move 1% of stock index to bond index every year in his Vanguard 401k... easy enough.
One last question.. this is more about the mechanics of getting this done:
I have never changed my allocations inside either a 401k or an IRA. When I buy and sell (or is it exchange???) in these accounts will I see taxes on the transaction show up on my 2016 tax return? I told my husband we won't because they're tax sheltered.. they're deferred until we take the money out (401k) or not at all (roth 401k and 2 roth IRAs), but he said, "okay, but what about the transaction itself?" Are we going to be taxed on the transaction and not the earnings" and I'm like, wha-whaa?
Anyway, I've yet to do this and I don't really know. Can anyone tell me if or how my changes in the 401k and IRA could affect my taxes next year?
there is no industry standard on target funds . at any given retirement date they are all over the map and quite frankly far to aggressive . they are all chasing the investor dollar and by pushing higher equity levels they hope to win you on a performance basis .
keep in mind there is noooooooooo standard as to how risky a target date should be even if you are at retirement .
the same 2010 target date fund from wells fargo in 2008-2009 lost 11.5% while the t.rowe price 2010 target fund lost 26.5%. that is a target fund that had 2 years to go before retirement. in fact the t.rowe target date fund didn't fall to below 45% equities until 5 years after the target date.
I want my allocation to reflect that of the target retirement fund 2040, but with:
-further diversification in equities
You have actually reduced diversification with your selections. The portfolio that has the greatest diversification is one that owns all equities in the market.
You have excluded portions of the market. Adding together "Large Value" and "Large Growth" is not the same as buying all large-cap equities. There is selection criteria for value, and different selection criteria for growth. Vanguard uses CRSP for their benchmarks so you will have to go look how CRSP selects for each, but it is different. Similar comment for large vs. small cap equities.
If you want maximum diversification, the best thing you can buy is a total market fund like VTI (which is the ETF version of VTSMX, their mutual fund. The ETF is cheaper than the mutual fund).
One other comment - AVFIX is very expensive - 0.82%. Vanguard has a small cap value fund, VBR, that is 1/10 the cost at 0.08%.
BTW, your portfolio is a classic "slice and dice" allocation. There is tons of debate on the boglehead forum about slice-and-dice vs. cap-weighting. You should go there and read the many, many threads on the different weights you can use for each of the 4 components. It is pretty interesting stuff.
Another approach people take is to have mostly total market fund (like VTI) and then "tilt" it towards one of the styles. The most popular tilt is towards small-value.
Last comment (I promise) - I noticed most of your selections are Vanguard institutional shares. It is much cheaper to own the equivalent Admiral shares. But you only get those if you are a Vanguard account holder. So if you aren't, you should be. It will save you money. Vanguard will automatically swap Institutional for Admiral once your account gets big enough.
I was actually thinking about this.... if it's in a 401k then I(we) really don't intend to withdraw from it for over 30 years. If we were talking about a taxable account then it would make more sense, or even an IRA, but not a 401k, especially since we're in a position to have many other sources of cash and income besides a 401k if an unfortunate drastic financial blow should arise. I'll give this more thought.
Thank you for mentioning that.
Keep in mind that the investment is the same if it is in a taxable account, 401k,IRA or a ROTH. However income taxes and early withdraw penalties differ.
I like the retirement target fund for people like your husband - they do not know what to do or do not care. However since you are interested in helping I would go to investments without a bond component.
Remember the ROTH option. That will let you take your original investment out without a penalty. It can be part of your emergency fund (thinking that you will never need it but you want a little extra security), but if it is you want CD's, money market, and maybe a very short term bond fund. Once you know you do not need it you can use the funds to buy equities.
Remember you can have a IRA or ROTH based on your husbands earnings so be sure to put some money in your funds.
Although return on investment is important pay attention to fees. Over time the fees can cost you a lot of money.
Keep in mind that the investment is the same if it is in a taxable account, 401k,IRA or a ROTH. However income taxes and early withdraw penalties differ.
I like the retirement target fund for people like your husband - they do not know what to do or do not care. However since you are interested in helping I would go to investments without a bond component.
Remember the ROTH option. That will let you take your original investment out without a penalty. It can be part of your emergency fund (thinking that you will never need it but you want a little extra security), but if it is you want CD's, money market, and maybe a very short term bond fund. Once you know you do not need it you can use the funds to buy equities.
Remember you can have a IRA or ROTH based on your husbands earnings so be sure to put some money in your funds.
Although return on investment is important pay attention to fees. Over time the fees can cost you a lot of money.
Okay, so when I sell everything in the 401k and start over with different funds I will be taxed? Is that true for the roth 401k and roth IRAs too? I thought since they are post-tax investments they won't be. I thought that was the point of roth accounts... tax-free forever provided you wait 5 years and are over the age limit.
My husband earns a high income so we backdoor roth IRAs. Our emergency fund is low (6 months) because we paid off the mortgage last month. It should be back to a year in a few months. I expect to keep my IRAs as long-term investments, and in fact, I honestly expect to pass them down to my children.. which makes me think that perhaps I ought to just do 100% equities I thought I had this all figured out. Now, maybe not. This is why I was thinking I need to see a fee-based financial advisor because they'll take everything like income level, net worth and life goals and tailor a plan based on that, instead of a one-size-fits-all plan.
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I thought I had this all figured out. Now, maybe not. This is why I was thinking I need to see a fee-based financial advisor because they'll take everything like income level, net worth and life goals and tailor a plan based on that, instead of a one-size-fits-all plan.
