Author Topic: 401k Allocation Help (% bonds for my age)  (Read 4953 times)

jesstach

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401k Allocation Help (% bonds for my age)
« on: January 23, 2014, 02:56:42 PM »
Hi,

I'm 27 and just recently started learning more about 401k/mutual funds/index funds/etc. I've always contributed something to my 401k and previously picked a bunch of mutual funds and basically had no idea what I was doing. I just read the Investor's Manifesto and have been reading up on the Bogleheads wiki page. 

I recently changed my 401k to be 100% Vanguard Target Retirement 2025, but was wondering if it's too conservative for my age with bonds (30%)? The next option is Vanguard Target Retirement 2035, which is only 15% bonds.


Current 401k (now contributing the max):
~$40k, 100% VANG TARGET RET 2025 (VTTVX) which consists of:

Vanguard Total Stock Mkt Idx Inv    48.68%
Vanguard Total Bond Market II Idx Inv    24.31%
Vanguard Total Intl Stock Index Inv    20.91%   
Vanguard Total Intl Bd Idx Investor    6.04%    
 

I don't currently have any other investments outside of the 401k. However, I will have about $10k of employer stock vesting this year (and for the next 2 years after, assuming the price is stable) and plan to sell it and buy Vanguard total stock market index in a taxable account. So this will bring the overall % of bonds down.

I'm planning to retire "early" (40's) and I will have 15 or more years to invest.


Other 401k plan options are the following:   


Name/Inception Date   Gross Expense Ratio

VANG TARGET RET 2015 (VTXVX) 10/27/2003    0.16%
VANG TARGET RET 2025 (VTTVX) 10/27/2003    0.17%
VANG TARGET RET 2035 (VTTHX) 10/27/2003    0.18%
VANG TARGET RET INC (VTINX) 10/27/2003    0.16%
VANG TARGET RET 2045 (VTIVX) 10/27/2003    0.18%
PIM TOTAL RT INST (PTTRX) 05/11/1987    0.46%
FIDELITY GOVT INCOME (FGOVX) 04/04/1979    0.45%
FID INST MMKT (FMPXX) 07/05/1985    0.21%
DFA EMERG MKTS VALUE (DFEVX) 04/01/1998    0.61%
AF EUROPAC GROWTH R6 (RERGX) 05/01/2009    0.50%
AF CAP WORLD G&I R6 (RWIGX) 05/01/2009    0.45%
VANG INST INDEX PLUS (VIIIX) 07/07/1997    0.02%
FID CONTRAFUND K (FCNKX) 05/17/1967    0.63%
FID OTC K (FOCKX) 12/31/1984    0.77%
VANG WINDSOR II ADM (VWNAX) 05/14/2001    0.27%
FID LOW PRICED STK K (FLPKX) 12/27/1989    0.76%
VANG MD CP IDX IS PL (VMCPX) 12/15/2010    0.06%
VANG EXPLORER ADM (VEXRX) 11/12/2001    0.34%
ABF SM CAP VAL INST (AVFIX) 12/31/1998    0.92%


So what do you think? Too conservative at 30% or is it OK since I will be adding a taxable account? Should I switch to Target Retirement 2035 or select some other funds?


shuffler

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Re: 401k Allocation Help (% bonds for my age)
« Reply #1 on: January 23, 2014, 03:20:27 PM »
How was it that you chose the 2025-date fund originally?
What was your thought process?

You're basically asking a question about how 'aggressive' you need to be in your investments.
Do you need to be aggressive?  You should think about your expenses vs. your savings, and what kind of return you'd need on those investments in order to achieve financial independence in 15 years.

Have you ever heard of an IPS?  You might want to fill one out.
http://www.bogleheads.org/wiki/Investment_policy_statement

But yeah, off the cuff, a 2025-date fund (11 years from now) does seem rather conservative for someone who is 27 and doesn't plan to retire for 15-ish years.

Johnny Aloha

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Re: 401k Allocation Help (% bonds for my age)
« Reply #2 on: January 23, 2014, 03:29:13 PM »
Agree with shuffler.  Risk tolerance is different for everyone.

If it were me (and if I was 27 again), I would be in the target retirement 2045.  Higher stocks/lower bonds.  You'll get a different answer from everyone you ask.

Lots of potential reading on assett allocation if interested ...

Frankies Girl

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Re: 401k Allocation Help (% bonds for my age)
« Reply #3 on: January 23, 2014, 03:34:05 PM »
Agree with shuffler.  Risk tolerance is different for everyone.

If it were me (and if I was 27 again), I would be in the target retirement 2045.  Higher stocks/lower bonds.  You'll get a different answer from everyone you ask.


^ that's what I would do in the same situation. But the VIIIX looks interesting too as it tracks the S&P... but that's a doozy of a minimum buy-in! :D

Allen

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Re: 401k Allocation Help (% bonds for my age)
« Reply #4 on: January 23, 2014, 03:51:46 PM »
Is being 100% stocks stupid?  That's me right now.

the fixer

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Re: 401k Allocation Help (% bonds for my age)
« Reply #5 on: January 23, 2014, 03:56:38 PM »
Consider your willingness, ability, and need to take risk. All three of these factors help you decide whether you should take on more or less risk than the conventional advice.

Willingness: how comfortable are you with volatility? Would you be tempted to sell at the bottom of the market because you're afraid it will go lower?

Ability: traditionally, this is "how long is your investment timeline and do you have any conceivable need for this money earlier?" For a Mustachian I think this is more of a "how flexible are your retirement plans? If your investment underperforms over the next ten years, are you willing/able to work longer to make up for it?" In other words, are you able to accept the tradeoff of probable better returns in exchange for less certainty in your plans?

Need: do your plans require a high rate of return to work? For early retirement this shouldn't apply. This is more of a concern for someone in their 50s or 60s and way behind on saving.

MMM and jlcollinsnh's aggressive advice is couched mainly in the recognition that aspiring early retirees have a high ability to take risk. If the market does poorly, just work an extra year or two. If you can accept this and adjust your willingness to take risk accordingly, you should be able to use more aggressive investment options (a lower bond %).

jesstach

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Re: 401k Allocation Help (% bonds for my age)
« Reply #6 on: January 23, 2014, 05:37:57 PM »
How was it that you chose the 2025-date fund originally?
What was your thought process?

You're basically asking a question about how 'aggressive' you need to be in your investments.
Do you need to be aggressive?  You should think about your expenses vs. your savings, and what kind of return you'd need on those investments in order to achieve financial independence in 15 years.

Have you ever heard of an IPS?  You might want to fill one out.
http://www.bogleheads.org/wiki/Investment_policy_statement

But yeah, off the cuff, a 2025-date fund (11 years from now) does seem rather conservative for someone who is 27 and doesn't plan to retire for 15-ish years.

I haven't heard of an IPS, I will look into it. Thanks for the link.

I was originally in target retirement 2035, but after I read Investor's Manifesto and some other resources that said "roughly your age in bonds... or 100 minus your age in stocks" I thought that I needed more bonds. Also, I believe in the book Bernstein says to go into your first bear market more conservative because people over-estimate their risk tolerance until they've actually experienced a drop. But now I'm thinking that I'm being too conservative.. I think that with everything I've read I now know enough to just wait it out and not sell at a low point.


Agree with shuffler.  Risk tolerance is different for everyone.

If it were me (and if I was 27 again), I would be in the target retirement 2045.  Higher stocks/lower bonds.  You'll get a different answer from everyone you ask.

Lots of potential reading on assett allocation if interested ...

I'd love some reading recommendations :)

Consider your willingness, ability, and need to take risk. All three of these factors help you decide whether you should take on more or less risk than the conventional advice.

Willingness: how comfortable are you with volatility? Would you be tempted to sell at the bottom of the market because you're afraid it will go lower?

Ability: traditionally, this is "how long is your investment timeline and do you have any conceivable need for this money earlier?" For a Mustachian I think this is more of a "how flexible are your retirement plans? If your investment underperforms over the next ten years, are you willing/able to work longer to make up for it?" In other words, are you able to accept the tradeoff of probable better returns in exchange for less certainty in your plans?

Need: do your plans require a high rate of return to work? For early retirement this shouldn't apply. This is more of a concern for someone in their 50s or 60s and way behind on saving.

MMM and jlcollinsnh's aggressive advice is couched mainly in the recognition that aspiring early retirees have a high ability to take risk. If the market does poorly, just work an extra year or two. If you can accept this and adjust your willingness to take risk accordingly, you should be able to use more aggressive investment options (a lower bond %).

Good questions to think about.

Willingness- I guess I've never experienced this yet, but hypothetically I KNOW not to sell, so I would just wait it out.

Ability- Retirement plans are definitely flexible, I could always work longer.

Need- I am maxing 401k and will be saving additional outside of it. I will run some numbers as shuffler suggested to see what type of return I would need to meet a goal of retirement in 15 years.

massmustache

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Re: 401k Allocation Help (% bonds for my age)
« Reply #7 on: January 23, 2014, 07:13:05 PM »
I am 31 and use 2045 for a more aggressive approach... I also have non-retirement assets and do balance it out a bit.  It's about 90/10 and then 70/30 domestic/international.

IMO, 30% bonds is too conservative.

Eric

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Re: 401k Allocation Help (% bonds for my age)
« Reply #8 on: January 24, 2014, 12:48:39 PM »
Is being 100% stocks stupid?  That's me right now.

Not as long as you don't panic and sell if there's a big drop or three.  Ride it out, and keep investing and you'll be fine.  Better than fine even.  I'm about 95% stocks right now, and increasing.  (assuming you're still in your accumulation phase like me)

http://jlcollinsnh.com/2011/06/14/what-we-own-and-why-we-own-it/