How (if?) to take off the target date fund training wheels

[wonkette]

I am a 29 year old who has been reading MMM for several years, but I’ve been focused on eliminating high interest student loans and I’m now ready to learn more about investing. As I’ve paid down loans I have been investing some, choosing target retirement date funds to keep it simple. I have read the investment order post and recently read the stock series. I currently have a 401k with ~140,000 in Vanguard 2055, a rollover TIRA from an old job with ~12,000 in Vanguard 2055, a Roth IRA with ~17,000 in Vanguard 2030, and a very new taxable account with ~1,500 in VTI. I also have an emergency fund in a money market account.

I think I would like to change some things up to achieve FIRE sooner and to learn more about investing.

Should I just stick with Vanguard 2055 for some of my tax deferred accounts? JL Collins gives them his seal of approval

The Vanguard 2030 in the Roth was kind of a weird decision I made based on my optimistic FIRE date. My thought was this would be the ‘bucket’ I would access first when FIREd but now I’m thinking I went too conservative.

I opened the taxable account a few weeks ago because I’m on track to max my 401k and I’ve already filled my Roth (first year I’ve been able to say that which is pretty cool). Was I too impatient in going in for VTI? Should I have accumulated enough to go in for VTSAX? Should I just take my whole portfolio across accounts to 100% VTSAX? Or maybe 90% VTSAX and 10-20% VBTLX?

I’ve only accumulated before, never sold or exchanged funds, any common pitfalls I should know that I wouldn’t find on the Vanguard site? Thanks for any thoughts or advice!

[haflander]

PTF. I'm in a very similar situation but with much smaller #s. Old 401ks that possibly need to be changed from target date funds to other options. Curious about what knowledgeable Mustachians have to say!

[TomTX]

I just have everything in VTI. I'm considering diversifying internationally since I'm over $200k. I've been considering for several years now.

I've been all-in on stocks through two major market crashes without panic selling.

You need to find an asset allocation which will keep you doing the same.

[jacoavluha]

My advice would be somewhere between 90:10 and 70:30 stocks and bonds. You can make changes in your 401k and IRAs with no tax implications. Vanguard would advise that between 20-50% of your stocks should be in international. I like 30%. VTI is fine for your taxable account as long as that’s long term money. You should have an emergency fund in cash (cash equivalents) so you don’t have to sell VTI or whatever if you have some unexpected expense come up.

50% US stock, 25% INtl stock, 25% bonds is nice and simple.

[waltworks]

Stick with target date. Set and forget.

-W

[MustacheAndaHalf]

I opened the taxable account a few weeks ago because I’m on track to max my 401k and I’ve already filled my Roth (first year I’ve been able to say that which is pretty cool). Was I too impatient in going in for VTI? Should I have accumulated enough to go in for VTSAX? Should I just take my whole portfolio across accounts to 100% VTSAX? Or maybe 90% VTSAX and 10-20% VBTLX?

VTI has the same contents as VTSAX for the same expense ratio.  I wouldn't worry about it, and certainly not before figuring out other allocations.

Target date funds start at 10% bonds, and increase as the target date approaches.  Without knowing your retirement date, it's hard to say what bond allocation to use.

Note target funds also have international, so consider adding VXUS.  That holds stocks from everywhere outside the U.S. (developed and emerging).

Note when you sell an ETF/mutual fund in a taxable account, you might have gains.  Any gains are taxable.  So if you sold VTI and it had gone up $200 worth, you'd pay tax on $200 worth of gains.  Since this was a recent purchase (less than a year), you'd pay ordinary income tax - maybe 22% of $200, maybe $44.  If you held it at least 366 days before selling, you'd owe a lower "long-term capital gains" tax rate of 15% (for most people), or $30 on $200 of gains.

[ClutchBeta]

What you're doing is very reasonable, and any improvements from this point are going to be marginal gains, not game changers. That said, I'm a similar age and net worth,  and this is what I would do:

• Get rid of the Target Retirement 2035. Its allocation is appropriate for a 48 year old planning to retire at 65, and unless you have a unique situation it's too conservative for a 29 year old aiming to retire at 46.
• Keep your taxable accounts exclusively US stock (VTSAX, VTI, etc.) Some people like to put their foreign stock accounts in taxable also, so they can get credit for foreign tax paid. I don't bother with this because I figure I'd end up generating capital gains when rebalancing between domestic and international stocks.  I probably lose a little money but it's simpler.
• Keep buying VTI at least until you have $10,000 to invest in admiral shares (VTSAX).  If and when you do make the switch, make sure your capital gains are all, or almost all, long-term. Also be aware that if you have a tax loss it will probably be a wash sale.
• Choose a stock/bond allocation. I won't go higher than 90% stocks; Adding those 10% of bonds gives a relatively large reduction in volatility for a relatively small reduction in expected returns.
• Choose a domestic/international split for your stocks. I agree with @jacoavluha that 20-50% international is reasonable, and I have chosen 30%. If in doubt, copy the target date funds' split.
• Optionally, decide on a domestic/international split for your bonds. This is a small thing, and you can do fine with just domestic.
• Use the Roth IRA to store the bonds (and maybe international stock) that you're not putting in taxable. Once you've done that, fill up the remainder according to your allocation.
• Manage your allocation jointly across the taxable and Roth IRA accounts.  Rebalance to your chosen allocation once a year by buying/selling within your Roth IRA. This way you'll both reduce and simplify your taxes.
• Optionally, switch your other tax-advantaged accounts from the target date funds to the allocation you chose earlier. I skipped this step because my 401(k) is amazing and has institutional class target date funds with lower expense ratios.
• Now is probably a good time to change your cost basis for the taxable account to "specific identification", which will allow you more flexibility to optimize your taxes.

The major theme here is to first think about your entire allocation holistically, then minimize expense ratios, then minimize taxes.

[jacoavluha]

another option - Paul Merriman talks about 2 funds for life: https://paulmerriman.com/2-funds-for-life/?fbclid=IwAR3SmZBzayDhQQtzZNNMV1xaOneru9VRYrCJddg4jWi-ABJPIszITWAYicI

He's a big fan of small cap value and is perhaps most known for the ultimate buy and hold portfolio but that's a bit complex. This recent suggestion is for your age * 1.5 in target date fund, and the rest in small cap value index fund.

[hadabeardonce]

I'm interested to see the opinions in this thread.

My 403b and 457 contributions were in a Vanguard TDF for a long time, then I switched over to four Admiral class funds to reduce expenses a little. Currently I mirror the asset allocation that Vanguard suggests for their TDF and manually rebalance.

Our Roth IRAs are still in TDFs. Taxable account is 100% VTSAX.

[jacoavluha]

I'm interested to see the opinions in this thread.

My 403b and 457 contributions were in a Vanguard TDF for a long time, then I switched over to four Admiral class funds to reduce expenses a little. Currently I mirror the asset allocation that Vanguard suggests for their TDF and manually rebalance.

Our Roth IRAs are still in TDFs. Taxable account is 100% VTSAX.

There are a million portfolios worse than this. Or worse than just a target date fund. There are not many that are better. And it's really hard to know what will be better in the future.

Most importantly:
1. pick a reasonable asset allocation
2. use low cost index funds
3. stick to the plan through the ups and downs

[wonkette]

Thank you for all the replies! Especially the reassurance that I haven't done too badly with my lazy strategy.

Switching out the 2030 is on the to-do list for THIS WEEK

In December, when I do my budget for the following year, I'm going to plot out how to get my whole portfolio to 10% bonds, 90% stock with 30% international exposure. Re-balancing in December, or maybe when I do my taxes, should be doable for me going forward. 

[seattlecyclone]

Nothing at all wrong with using target date funds for the short term. In the long term, you may find that these funds switch you to a more bond-heavy allocation than you may want for a long retirement.

The good thing is that there are no tax consequences or trading fees for switching your investments within your retirement accounts. As long as you're happy with the stock/bond split of your current fund, nothing wrong with keeping it there and planning to switch if that ever changes. Within a taxable account you'll be liable for capital gains taxes, so think twice about making new investments in something you might want to switch out of in a decade or three.