Author Topic: Best use of my Vanguard funds?  (Read 3123 times)

deek

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Best use of my Vanguard funds?
« on: April 13, 2018, 11:59:51 AM »
Finally got my old 401k moved over. Which index funds are the smartest to use at 26? I make 38k right now, and once I pay off my high interest student loans (just under 6k left) I plan on contributing to this a bunch. It will be a Roth, as I don't see my current tax rate getting lower later in life. (I think that makes sense?)

Basically what I know about index funds is that the contributor is almost guaranteed to benefit in the long term with little risk. Is there certain funds that return a few percent better than others?

Let me know what other information is helpful, if you have any advice. Thanks!!

RWD

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Re: Best use of my Vanguard funds?
« Reply #1 on: April 13, 2018, 01:17:18 PM »
Was your 401k a Roth as well? If not you'll owe taxes converting it to a Roth IRA.

You've been on the forums for over a year now. Surely you've seen the Stock Series? That should answer most your questions.
http://jlcollinsnh.com/stock-series/

The short answer is VTSAX for US domestic stocks, VTIAX for international, and VBTLX for [US] bonds. At 26 you should be heavily leaning towards stocks if not 100%. Further reading:
https://www.bogleheads.org/wiki/Asset_allocation
https://www.bogleheads.org/wiki/Investment_policy_statement

deek

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Re: Best use of my Vanguard funds?
« Reply #2 on: April 13, 2018, 01:30:23 PM »
Was your 401k a Roth as well? If not you'll owe taxes converting it to a Roth IRA.

You've been on the forums for over a year now. Surely you've seen the Stock Series? That should answer most your questions.
http://jlcollinsnh.com/stock-series/

The short answer is VTSAX for US domestic stocks, VTIAX for international, and VBTLX for [US] bonds. At 26 you should be heavily leaning towards stocks if not 100%. Further reading:
https://www.bogleheads.org/wiki/Asset_allocation
https://www.bogleheads.org/wiki/Investment_policy_statement

For some reason I haven't added that to my favorites. I got into it several months ago and haven't set aside time to go through it. Still on my list. But thank you.

Do both of those stock funds require minimum of $10,000? Unfortunately my fund is just over 3k. No the old 401k was not a Roth.
« Last Edit: April 13, 2018, 01:33:05 PM by dj »

RWD

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Re: Best use of my Vanguard funds?
« Reply #3 on: April 13, 2018, 01:55:47 PM »
Was your 401k a Roth as well? If not you'll owe taxes converting it to a Roth IRA.

You've been on the forums for over a year now. Surely you've seen the Stock Series? That should answer most your questions.
http://jlcollinsnh.com/stock-series/

The short answer is VTSAX for US domestic stocks, VTIAX for international, and VBTLX for [US] bonds. At 26 you should be heavily leaning towards stocks if not 100%. Further reading:
https://www.bogleheads.org/wiki/Asset_allocation
https://www.bogleheads.org/wiki/Investment_policy_statement

For some reason I haven't added that to my favorites. I got into it several months ago and haven't set aside time to go through it. Still on my list. But thank you.

Do both of those stock funds require minimum of $10,000? Unfortunately my fund is just over 3k. No the old 401k was not a Roth.

Each of those funds has a $3k minimum and ETF version:
- VTSAX = VTSMX = VTI
- VTIAX = VGTSX = VXUS
- VBTLX = VBMFX = BND

Since you only have $3k my recommendation would be to just drop it all in VTSMX. You can convert it to Admiral Shares (VTSAX) if/when it exceeds $10k in the future.

FlorenG

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Re: Best use of my Vanguard funds?
« Reply #4 on: April 13, 2018, 03:34:57 PM »
Quote
Basically what I know about index funds is that the contributor is almost guaranteed to benefit in the long term with little risk. Is there certain funds that return a few percent better than others?

My guess is you'll end up putting ~90% of your savings in VTSMX and then transform to Admiral (VTSAX) as you reach $10,000 (even lower cost).

While it is true that risk is low if your time frame is beyond 12 years, be aware that during that time you should expect to see huge drops (that later will recover). Stay cool, DO NOT SELL, keep saving and buying shares while they are low. To avoid freaking out in case the market drop also coincides with a job-loss (which happened to a lot of people in 2008), make sure you put together an emergency fund that keeps you going without tapping into your savings while things look scary.

But congrats to you DJ, being 26 and already taking the steps to save and invest put you in a GREAT place!

deek

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Re: Best use of my Vanguard funds?
« Reply #5 on: April 13, 2018, 03:42:14 PM »
Quote
Basically what I know about index funds is that the contributor is almost guaranteed to benefit in the long term with little risk. Is there certain funds that return a few percent better than others?

My guess is you'll end up putting ~90% of your savings in VTSMX and then transform to Admiral (VTSAX) as you reach $10,000 (even lower cost).

While it is true that risk is low if your time frame is beyond 12 years, be aware that during that time you should expect to see huge drops (that later will recover). Stay cool, DO NOT SELL, keep saving and buying shares while they are low. To avoid freaking out in case the market drop also coincides with a job-loss (which happened to a lot of people in 2008), make sure you put together an emergency fund that keeps you going without tapping into your savings while things look scary.

But congrats to you DJ, being 26 and already taking the steps to save and invest put you in a GREAT place!

Thank you. I'm not sure what the outlook is as far as the next financial crisis, but I have been focusing more on getting rid of my 6.8% student loan debt than my E-fund. Some say that's a bad idea, some say that's a good idea. I'm not really sure.

My hands are a little tied until June 1 because I have to pay an arm and a leg for insurance until my new employer's plan kicks in.
« Last Edit: April 13, 2018, 03:49:18 PM by dj »

FlorenG

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Re: Best use of my Vanguard funds?
« Reply #6 on: April 13, 2018, 04:35:58 PM »
Quote
I have been focusing more on getting rid of my 6.8% student loan debt than my E-fund.

That percentage is similar (maybe a little smaller) than what you'll get investing, but the satisfaction of getting rid of a debt is a psicological bump so I would go for it first too.

Quote
I'm not sure what the outlook is as far as the next financial crisis

I wasn't trying to predict when the next crisis will happen, I don't play that game. But history tells you that almost certainly there will be more and what is the best way to react to them (don't sell and buy if you can.) Just wanted you to be mentally prepared for them because they can be tough and being ready financially and mentally will help you stay in course. That's all.

deek

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Re: Best use of my Vanguard funds?
« Reply #7 on: April 24, 2018, 01:03:38 PM »
I wanted to follow up here. The funds have finally showed up in my Vanguard account.

If I place those in a Roth, will that amount get taxed before it goes into the Roth? It's only just over 3k.

If so, it will probably be taxed at 20-25%, which knocks my amount down to under $2500. It's probably smart to just get a roth started isn't it? I don't see my tax rate being lower than it is now for at least a long long long time.
« Last Edit: April 24, 2018, 01:13:58 PM by dj »

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Re: Best use of my Vanguard funds?
« Reply #8 on: April 24, 2018, 01:23:07 PM »
I wanted to follow up here. The funds have finally showed up in my Vanguard account.

If I place those in a Roth, will that amount get taxed before it goes into the Roth? It's only just over 3k.

If so, it will probably be taxed at 20-25%, which knocks my amount down to under $2500. It's probably smart to just get a roth started isn't it? I don't see my tax rate being lower than it is now for at least a long long long time.

No, taxes won't be taken out when you contribute.  They will be due next year when you pay taxes.  For a rollover you need to contribute the full amount, otherwise you could be subject to the additional 10% early withdrawal penalty.

Personally, if it were me, I would just roll it over to an IRA.  No one really knows what the taxes will be like when they retire and when you leave it as an IRA it gives you a little more control as to how you pay those taxes.

Otherwise, starting a Roth is a good idea once you payoff your loans.

deek

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Re: Best use of my Vanguard funds?
« Reply #9 on: April 24, 2018, 01:28:42 PM »
I wanted to follow up here. The funds have finally showed up in my Vanguard account.

If I place those in a Roth, will that amount get taxed before it goes into the Roth? It's only just over 3k.

If so, it will probably be taxed at 20-25%, which knocks my amount down to under $2500. It's probably smart to just get a roth started isn't it? I don't see my tax rate being lower than it is now for at least a long long long time.

No, taxes won't be taken out when you contribute.  They will be due next year when you pay taxes.  For a rollover you need to contribute the full amount, otherwise you could be subject to the additional 10% early withdrawal penalty.

Personally, if it were me, I would just roll it over to an IRA.  No one really knows what the taxes will be like when they retire and when you leave it as an IRA it gives you a little more control as to how you pay those taxes.

Otherwise, starting a Roth is a good idea once you payoff your loans.

This does make sense, as my #1 goal is paying off my loans right now. I'm also contributing 5% to my employer's simple IRA (they match 3%). Set up for 90/10.

Interest Compound

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Re: Best use of my Vanguard funds?
« Reply #10 on: April 24, 2018, 01:29:47 PM »
I wanted to follow up here. The funds have finally showed up in my Vanguard account.

If I place those in a Roth, will that amount get taxed before it goes into the Roth? It's only just over 3k.

If so, it will probably be taxed at 20-25%, which knocks my amount down to under $2500. It's probably smart to just get a roth started isn't it? I don't see my tax rate being lower than it is now for at least a long long long time.

No, taxes won't be taken out when you contribute.  They will be due next year when you pay taxes.  For a rollover you need to contribute the full amount, otherwise you could be subject to the additional 10% early withdrawal penalty.

Personally, if it were me, I would just roll it over to an IRA.  No one really knows what the taxes will be like when they retire and when you leave it as an IRA it gives you a little more control as to how you pay those taxes.

Otherwise, starting a Roth is a good idea once you payoff your loans.

Agreed. If you call Vanguard they should be able to recharacterize this from a Roth IRA rollover, to just an IRA Rollover. Then you won't owe taxes on it.

deek

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Re: Best use of my Vanguard funds?
« Reply #11 on: April 24, 2018, 01:40:26 PM »
Does it make any sense to look at mutual funds at all?

Interest Compound

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Re: Best use of my Vanguard funds?
« Reply #12 on: April 24, 2018, 01:40:38 PM »
Basically what I know about index funds is that the contributor is almost guaranteed to benefit in the long term with little risk. Is there certain funds that return a few percent better than others?

Risk is dependent on your asset allocation, and which index funds you choose.

Your question has many red flags indicating you're still new to the world of investing. After speaking with hundreds of people about investing, I've come to recommend Vanguard's automatic accounts. MrMoneyMustache also recommends an automatic portfolio for his readers. Psychologically it makes sense. It takes the newbie's decision making out of the equation, as they put their portfolio in the hands of an expert. And what better expert than Vanguard? The only investment firm that's legally obligated to act in our best interests?



You have two amazing options:

1. "I want Vanguard's experts to do everything for me. I'll just tell them my age and they'll put it in the appropriate Target Retirement Fund"



2. "I want Vanguard's experts to do everything for me. I'll just tell them how much risk I want, and they'll put it in the appropriate LifeStrategy Fund"



Since you're investing for the long-term, I'd put everything in TargetRetirement, then forget about it.

Choosing a Vanguard automatic account is effectively like saying, "Hey Vanguard. Will you manage that 3-fund portfolio (what RWD recommended in the first reply) for me that I keep hearing so much about?" These accounts:
  • Don't require advanced knowledge of the market to invest (anybody can do it with a few button pushes)
  • Are professionally managed automatically, by the only company which generates just enough profit to cover its costs, and with no outside owners (they are owned by people like you who invest with them) truly operates with your best interests in mind.
  • Relieve you of the burden of choosing your own asset allocation, and does so with no tracking error. Reducing behavioral mistakes and possible emotional abandonment to the strategy, the biggest risk to your portfolio.
  • Automatically rebalance.
  • Gradually get less risky as you age (TargetRetirement).
  • Keep you from tinkering with your portfolio.
  • Let you easily schedule automatic contributions while keeping your allocation balanced ($500 a paycheck automatically invested for example).
  • Let you easily schedule automatic distributions while keeping your allocation balanced ($4000 a month automatically deposited to your bank account for example).
  • Let you "Set it and forget it". You can literally login once, schedule automatic contributions, and come back 30 years later knowing everything has been taken care of for you.
  • Reinvest dividends automatically.
  • Don't try to beat the market by adding 10% of this and 5% of that. The aim is not to separate winners from losers, but rather to hold the entire market.
  • Give you the most diverse portfolio possible, with 21,600+ individual holdings across the world.
  • Allow you to easily invest money separately based on goals. Short-term money vs long-term money vs retirement money, for example.

deek

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Re: Best use of my Vanguard funds?
« Reply #13 on: April 24, 2018, 02:21:04 PM »
I'm 26 and would like to retire by 55 if not earlier. Should I shoot for the "about 30 years" option right away?

RWD

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Re: Best use of my Vanguard funds?
« Reply #14 on: April 24, 2018, 02:52:27 PM »
I'm 26 and would like to retire by 55 if not earlier. Should I shoot for the "about 30 years" option right away?

The target date retiremement funds are calibrated for risk based on age (life expectancy), not actual retirement date. So you should pick one about 40 years out.

harvestbook

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Re: Best use of my Vanguard funds?
« Reply #15 on: April 24, 2018, 03:33:51 PM »
Quote
I have been focusing more on getting rid of my 6.8% student loan debt than my E-fund.

That percentage is similar (maybe a little smaller) than what you'll get investing

That is not a given. Debt is certain. Market growth isn't.

Interest Compound

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Re: Best use of my Vanguard funds?
« Reply #16 on: April 24, 2018, 04:44:53 PM »
I'm 26 and would like to retire by 55 if not earlier. Should I shoot for the "about 30 years" option right away?

The target date retiremement funds are calibrated for risk based on age (life expectancy), not actual retirement date. So you should pick one about 40 years out.

Agreed. Always choose the Target Retirement fund based on your current age.

"I want Vanguard's experts to do everything for me. I'll just tell them my age and they'll put it in the appropriate Target Retirement Fund"

deek

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Re: Best use of my Vanguard funds?
« Reply #17 on: April 27, 2018, 09:34:37 AM »
If I go Target 2055 are you recommending a general account or IRA? @Interest Compound
« Last Edit: April 30, 2018, 11:24:25 AM by dj »

deek

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Re: Best use of my Vanguard funds?
« Reply #18 on: May 23, 2018, 12:11:17 PM »
If I go Target 2055 are you recommending a general account or IRA? @Interest Compound

Wanted to follow up here.. Thanks!

MustacheAndaHalf

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Re: Best use of my Vanguard funds?
« Reply #19 on: May 24, 2018, 05:01:34 AM »
Your 401(k) account became a Traditional IRA when it arrived at Vanguard.  If you expect your income will probably be higher in the next several years, you could use a Roth Conversion to turn that Traditional IRA of $3k into a Roth IRA.  You owe tax on the conversion, which is why picking a year with low taxes makes sense.

But you could also setup a new Roth IRA with $5,500 or less of after-tax money.

You might also take a look at Vanguard ETFs, since you can buy them 1 share at a time if you like.  For example, VTI's (Total US Stock Market) price is $141/share.  So you could buy 14 shares x $141 = $1974, and have $1026 left over to diversify into international.  VXUS (total international) has a price of $56.89/share, so you could buy 18 shares x $56.89 = $1024.02.   So that would leave you 2/3rds in US, 1/3rd international with $2 in cash.  ETFs have lower minimums and cost $0/trade, so keep them in mind.

FIRERoad

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Re: Best use of my Vanguard funds?
« Reply #20 on: May 24, 2018, 01:22:21 PM »
Try this sticky post and try to apply it to your situation:

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

It has helped me to refer to this.  I kind of know the logic but it helps to look at it in this simple organized list.  If you don't fully understand the logic it is fun to read up on it and figure out or ask on here.  Check out a lot of the stickies under the various topics.  Again, I've found them helpful.

As your income goes up over time your strategy might change.  In your situation, you are at a low marginal tax bracket (12%) and you should be for a little while assuming you are using 12k standard deduction.  It probably makes sense for you to fund employer plan up to max match, then contribute what you can to to the a ROTH with after tax dollars.  On your 401k, you could go either way I think.  Roll it into new employer pretax plan or an IRA and then either leave it there or roll it over to a ROTH while your marginal tax bracket is low. Once you creep above the 22% and beyond, you may want to focus on your pretax dollar accounts.   And then if you choose to retire/semi retire early you can start trying to figure out how to get it back out while avoiding paying higher taxes...  That is what I am trying to do now!  Have fun!

deek

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Re: Best use of my Vanguard funds?
« Reply #21 on: May 24, 2018, 01:59:57 PM »
Try this sticky post and try to apply it to your situation:

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

It has helped me to refer to this.  I kind of know the logic but it helps to look at it in this simple organized list.  If you don't fully understand the logic it is fun to read up on it and figure out or ask on here.  Check out a lot of the stickies under the various topics.  Again, I've found them helpful.

As your income goes up over time your strategy might change.  In your situation, you are at a low marginal tax bracket (12%) and you should be for a little while assuming you are using 12k standard deduction.  It probably makes sense for you to fund employer plan up to max match, then contribute what you can to to the a ROTH with after tax dollars.  On your 401k, you could go either way I think.  Roll it into new employer pretax plan or an IRA and then either leave it there or roll it over to a ROTH while your marginal tax bracket is low. Once you creep above the 22% and beyond, you may want to focus on your pretax dollar accounts.   And then if you choose to retire/semi retire early you can start trying to figure out how to get it back out while avoiding paying higher taxes...  That is what I am trying to do now!  Have fun!

So I am currently enrolled in a simple IRA through my employer. I get a 3% match, currently put in 5% for a total of 8%. My funds are in VG just sitting there in that IRA and are not in a brokerage account. Are you saying it wouldn't be a bad idea to just move my 3k to a ROTH in VG right away? Then just continue to contribute to my employer plan and put any extra into my Roth?

FIRERoad

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Re: Best use of my Vanguard funds?
« Reply #22 on: May 24, 2018, 04:59:05 PM »
At your current income ~38k or so plus other deductions that will reduce your taxable income, your marginal tax rate should be 12%, not 20-25%.

So, if you roll your IRA funds (pre-tax) into a ROTH (post tax account) you will have to pay taxes on that amount at a 12% rate.

In my understanding, you should notice or "take the hit" when you do your taxes next year and claim that this amount was rolled over from a pre tax to a post tax account.  It will increase your taxable income by the roll over amount.  It will either reduce your tax return or you will have to pay a little more in taxes depending on your situation and how you claim your deductions. Hopefully someone else could confirm this but that is how I understand it.

You could also just leave it in the IRA and withdraw it later when you choose to retire when you will also be ideally in a lower tax bracket.

Yes, if you follow the steps in the link:

WHAT           
0. Establish an emergency fund to your satisfaction           
1. Contribute to your 401k up to any company match   <- check, you are already doing this   
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.  <- your student loans maybe, maybe not?     
3. Max HSA  <- you may want to prioritize this over ROTH or IRA if/when available to you
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   <- do ROTH until your taxable income pushes you into 22%+ tax brackets         
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA deduction, swap #4 and #5)           
6. Fund a mega backdoor Roth if applicable.         
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.           
8. Invest in a taxable account and/or fund a 529 with any extra.           

Hope this helps.
« Last Edit: May 24, 2018, 05:03:09 PM by FIRERoad »