Low Expense Ratio Strategy For Somewhat Early Retiree

[GueroKC]

My mother-in-law is nearly 60 and has done a great job of saving her entire life. She has a fairly sizable nest-egg and a paid-off mortgage. She is currently working with a financial planner who charges her a 1% expense ratio.

Clearly that 1% expense ratio is going to cost her a ton of money over time. I've suggested she look into some Vanguard funds with low expense ratios that could save her hundreds of thousands of dollars. Problem is, as a 30 year old, I'm very familiar with the funds someone my age should be investing in, but not so familiar with what someone looking to retire at the age of 60 should be investing in.

She is fairly risk averse and prioritizes having money left over to give to her children over flashy spending or traveling.

Any tips?

Thanks.

[sokoloff]

My unconventional advice, given your statement of her priorities and making one assumption (that her stache is large enough that she can live off 2% of it per year), is to consider the possibility that she should invest the money fairly aggressively as the money is intended for someone with your or your children's expected lifespan. That's something like VTSAX (and 95% invested or more).

Backing off a bit from that would be something like a small amount of cash, 20-25% bond fund, and the balance stocks.

It all hinges on her monetary needs relative to the size of her stache. If she needs to spend 4%, she's investing for her lifetime and needs to take a more conservative approach [as traditionally advocated]. If she needs/wants to only spend 2%, she's investing for your lifetime. You don't have to share what "fairly sizable nest-egg" means, but the answer depends on it, so I tried to give you the "if-then-else-if" version of it.

[MDM]

...I'm very familiar with the funds someone my age should be investing in, but not so familiar with what someone looking to retire at the age of 60 should be investing in.

Unless the funds with which you are familiar are "funds of funds" (e.g., a target retirement date fund), there isn't necessarily any difference between which funds a 30 year old or a 60 year old should use - but there may be a difference in how much of each.

Might be worth perusing Question about pension and risk - Bogleheads.org for various viewpoints.  As sokoloff noted, there are different ways one can view her situation.  E.g., from that bogleheads thread:

1) You have more than you need, thus no need to take risks with your investments. Relax, be conservative, and enjoy.
2) You have more than you need, thus you can take risks with your investments. Relax, be aggressive, and enjoy.

Take your pick.

[GueroKC]

Thanks sokoloff.

Your advice about investing for our timeline rather than a typical retiree timeline makes a lot of sense to me. I'm just not sure I could get her to go along with it.

I was showing her some numbers last night comparing the expense ratio of VTSAX Admiral shares to what she's being charged now, and how the compounding of that difference can cost her a lot of money. She has asked me for some advice, but I'm still trying to frame it as "if I were you" instead of "do this".

Is there a specific Vanguard bond fund that is the "VTSAX" of bond funds?

[pbkmaine]

Look at Vanguard Wellington and Vanguard Wellesley Income.

[MDM]

See also Three-fund portfolio - Bogleheads.

[GueroKC]

Will look at all of the above. Thank you.

Unless the funds with which you are familiar are "funds of funds" (e.g., a target retirement date fund), there isn't necessarily any difference between which funds a 30 year old or a 60 year old should use - but there may be a difference in how much of each.

I was referring to target date funds. I guess saying I'm "very knowledgeable" is a stretch. Forgot I was asking a question on a board full of experts rather than comparing myself to the general non-mustachian population. :)

[sokoloff]

Thanks sokoloff.

Your advice about investing for our timeline rather than a typical retiree timeline makes a lot of sense to me. I'm just not sure I could get her to go along with it.

I was showing her some numbers last night comparing the expense ratio of VTSAX Admiral shares to what she's being charged now, and how the compounding of that difference can cost her a lot of money. She has asked me for some advice, but I'm still trying to frame it as "if I were you" instead of "do this".

Is there a specific Vanguard bond fund that is the "VTSAX" of bond funds?

VBTLX.

Here's a good Vanguard resource with an interactive calculator showing the advantage of 50 basis point reduction in fees (one half of one percent): https://investor.vanguard.com/mutual-funds/low-cost

$1,000,000 invested for 30 years at 50bpp difference in fees is $750,000 in fees avoided! Roughly double that for the 1% fee avoided.

cFIREsim is a good web tool to use for modeling as well. Here's a model, assuming a $1,000,000 initial stache, a 95/4/1 stock/bond/cash split, and a 4% withdrawal rate every year: http://www.cfiresim.com/input.php?sid=7428da858dd1bca5dadacccf57265bf1 (load MMM-1; if you need a username/pwd, use HNHN and HNHNHN respectively)

Obviously, that a 100% success rate (because when the retirement account shrinks, so do the withdrawals proportionally).

If you start with a $35K withdrawal rate and increase it by inflation every year (load MMM-2 scenario), you still never run out of money in historical market return sequences. This by the way takes no credit for Social Security or any other sources of income/spending money.

If you bump the initial spending to $40K and increase by inflation, the retirement runs out of money in 5% of historical cases, which is why the actual size of the stache matters (as does Social Security/other income sources).

[secondcor521]

Is there a specific Vanguard bond fund that is the "VTSAX" of bond funds?

I like and use VBTLX for this purpose.

Wellington and Wellesley are great funds, but they are IIRC balanced funds which contain both stocks and bonds.  I prefer to do my asset allocation explicitly myself with pure stock and pure bond funds, rather than delegate that to the mutual fund managers - but that is just my personal preference.

What you could do is, with her permission, take a look at her current portfolio either manually or plugging it into a portfolio analyzer to find out what her current stock/bond/whatever allocation is.

Then you can replicate the same asset allocation with VTSAX, VBTLX, and maybe some other specialized funds if she owns TIPS or REITs or internationals or whatever and wants to maintain an investment in those types of things.

That way, she has the same investment mix, just at a lower cost.

Be careful!  If her investments are in a taxable account, she might very well incur a large tax penalty if she switches investments.  If this is the case, then what you can do is transfer the assets "in kind" to a place like Vanguard.  The fees associated with the investments themselves would continue, but the advisor fee would stop.

[SeattleCPA]

To add another idea (sort of), my default recommendation is a cheap target retirement fund.

You'll get great diversification at very low cost. And a solution that basically means you can sell the idea, "oh Mom... don't worry... Vanguard (or whomever) has thought about what's an appropriate asset allocation formula for someone in your shoes."

BTW I have both my 80-year parents in a target retirement fund ( Vanguard's target retirement income fund) and my two twenty something daughters (Vanguard target retirement 2050 or whatever)

P.S. I am not in a target retirement fund because (a) they weren't available when I saved for retirement and (b) I've got assets that I can't convert to Vanguard shares.

P.P.S. A target retirement fund won't work well if the rebalancing creates tax bills for investor.