Vanguard’s Total Retirement 2050 (for example), has an expense ratio of 0.18% and no other fees. Compared to their Total Stock Index (0.17%), Total International Stock Index (0.22%) and Total Bond Market Index (0.2%), which are the 3 funds the Total Retirement 2050 invests in.
Of course, if you don’t think that underlying allocation is wise, the target date fund isn’t good for you. But there aren’t built in fees and the performance is pretty transparently going to match something you could have done easily yourself. It’s only marginally different from the advice in this thread, for instance.
Vanguard’s target date funds are particularly nice for someone just starting out in that the initial investment required is only $1000. Not only 1/3rd the minimum for most IRAs, but you get exposure to several funds on day 1 and without any fees built in that you wouldn’t otherwise pay.
Well, Vanguard is considered the best of the best among target date funds.
I’m showing their fees at .23% (.19 for management, .03 for transaction costs), which is very low compared to other similar funds. Vanguard usually is. However, it’s also tracking 10% below the returns of the S&P, with comparable volatility over the past few years. It was up over the S&P for a while in 2009 & 2010.
Hah, bumping this because I have an amusing question.
I finally decided to bite the bullet and invest in the Vanguard 500 index fund. However, I seem to be barred from doing so. Why? Because you need $10K minimum to start it, but the web app also tells you that the IRS bars me from investing more than $5500 in one tax year!
This seems so basic and absurd that I know I must be missing something. What is it? Switching between traditional and Roth didn’t seem to do anything.
Are you looking at the Admiral fund? The normal S&P 500 (VFINX) appears to only have a limit of $3k. Which I’d be a little surprised if they didn’t waive for IRAs, but I only have a 401(k) through work so what do I know?
Addendum: It looks like my “problem” was that I was telling the truth and saying I wanted to save for retirement. That’s why the Vanguard web system offered me IRAs. Is there any advantage to buying into the index fund through an IRA as opposed to a “general savings” option? If so, is it possible, given what I said above?
Yes, because that’s what was being suggested in this thread, right?
In either case, I have $10K to invest, so I want to invest that $10K, not just $3K. And if there is a way to waive the limit, the Web system wasn’t letting me do it. I don’t expect them to waive IRS regulations anyway.
You can invest an infinite amount of money in an index fund if you don’t want it to be an IRA. But from a financial standpoint, you should always max out an IRA, assuming you’re eligible, to get the maximum tax benefit. That’s where the $5500 limit comes from. So yeah, you can’t start an IRA with Admiral Fund shares (although you could probably rollover an existing one). The difference between the two funds is negligible, though: put the most you can into the regular S&P500 index fund (VFINX) and put the remaining in a non-IRA account until next year when you can put it into the IRA.
The maximum annual Roth contribution is $5,500. I would put as much as you can into the Roth, and any excess into a taxable investment account. If you’re not already putting the full $5,500 into a Roth each year, I would hang onto your money for six months so that you can make the full $5,500 investment for 2014.
Are you looking at Vanguard’s S&P 500 Investor Class Fund (VFINX)? It has a $3000 minimum.
Also, I’m not sure what you’re suggesting above. If I can only put in $5500 into an IRA (I already have a Roth elsewhere*), what exactly do I do with the other $4500? The logic is that I’ll be able to transfer that $4500, whatever I do with it now, into the index fund next year? And if I want the full $10K in the Vanguard index fund, I have to wait a year? And it’s worth waiting to do, rather than invest the entire amount right now?
According to the IRA chooser on the Vanguard site, I should be putting my money into a Traditional IRA, because I’m not certain that my retirement income and tax burden on such will be the same or go up when I retire. True?
You say you’re investing $10K to $12K in a Vanguard fund, which is good. I found out only after the fact that Vanguard charges a $20 fee per year for any fund in which you keep less than $10K.
It looks like Leaper’s link was only showing the lowest cost fund in each class, which for the 500 Index funds is the Admiral (with a higher minimum). Try unclicking the $10,000 and $25,000 fund minimum options on the left of your link, and VFINX should show up.
Your total contributions to all IRAs combined, Roth and traditional, is $5,500. If you want to invest more than that each year, you will need to use a taxable account. The good news is that means you can contribute your entire $10,000 at one time, and you can purchase a fund with a higher minimum. The bad news is that this money will be after tax and won’t grow tax free.
It sounds like you plan to make an immediate contribution of $5,500 to the Roth IRA. Wouldn’t it be better to spread out the contributions over the rest of the year? Perhaps $1,000 per month. And next year, you might contribute $500 per month. In other words, I recommend dollar-cost averaging into the fund. I imagine (although I don’t know for sure) that you can put the whole sum in the Roth IRA but leave most of it in a safe boring bond fund and then but into the S&P index fund each month.
I am a fan of DCA, but as a savings technique. With cash in hand, I’d invest it all now. (Not to start a debate, but last month bonds were anything but boring… Might be time for short to intermediate term bonds)
They waive the fee for an IRA if you accept electronic delivery of your account documents. I also found out that once your balances are high enough to qualify for the Admiral shares, they convert them for you automatically (unless you don’t want them).
Rather than the the “Target Date” Vanguard funds, I recommend the “LifeStrategy” series. They give you a balance of index funds --stock, bond and international-- for a single $3000 minimum investment.
LifeStrategy Growth (the riskiest) is:
57% Total (US) Stock Market,
23% Total International,
16% Total US Bond,
4% Total International Bond.
The others (in risk order) are Moderate Growth, Conservative Growth, and Income. The percentage of bonds is increased and the percentage of international decreased.
Because the percentages of the index funds are roughly maintained, the LifeStrategy Funds are (somewhat) self balancing.
About not buying bonds: I felt that way for a long time (and legendary investor Peter Lynch agreed.) But after the market meltdown in the 2000s, I believe in keeping a good percentage of bonds. If I’d had to retire at that time, or cash out my stocks I would have been screwed.
The famous balanced funds, such as Vanguard Windsor, that keep a goodly measure of bonds do just about as well as pure stock funds and are less volatile.
And… there’s actually no guarantee that the market will keep going up forever. If the population stops increasing, if we exhaust key resources, if we get tired of consumerism, if the ocean shores move in 2%, if humans just lose their mojo, then you might see negative stock growth for decades or centuries. Bonds could ease the blow. (Disclaimer: I’m not an economist.)