Author Topic: Target date fund vs. VTSMX - recommendation question  (Read 3417 times)

vespito

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Target date fund vs. VTSMX - recommendation question
« on: February 07, 2014, 03:11:52 PM »
Hi all,
I am helping a friend do a roll-over tonight.  She knows she needs to do something for retirement but is not very interested in investing; I think she wants to set it and forget it. 

Some specifics:

1) age 33
2) funding source - I believe she has about 5k in an old employer account that is being assessed account fees.
3) Emergency fund - as far as I know, she doesn't have one
4) 401k / employer plan - none
5) Retirement date - 65 (unfortunately)

Since she has no emergency fund and the amount is not large (in terms of a tax hit - I doubt this will bump her into another bracket), I think a Roth IRA may be best choice.

Is it better to just put everything in Total Stock Market Index Fund (0.17% fee) or the appropriate Target Retirement fund (0.18% fee).  Since the fees are the same, it comes down to risk.  As this will also act as an emergency fund I am leaning towards the Target retirement fund.

Of course, if I find out she has 10K or more, than the expense ratio of the total stock admiral fund (0.05%) does make a difference and will lead to more thinking.

I plan on presenting these two - she'll need to make the choice herself - but what say you?  Would I be shortchanging her account growth by recommending the Target fund?

edit - clarity
« Last Edit: February 07, 2014, 04:15:39 PM by vespito »

foobar

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Re: Target date fund vs. VTSMX - recommendation question
« Reply #1 on: February 07, 2014, 08:03:30 PM »
Go with the target fund. It isn't perfect by any means but for a person that just wants to sink in 5k/yr, it is close enough.

Hi all,
I am helping a friend do a roll-over tonight.  She knows she needs to do something for retirement but is not very interested in investing; I think she wants to set it and forget it. 

Some specifics:

1) age 33
2) funding source - I believe she has about 5k in an old employer account that is being assessed account fees.
3) Emergency fund - as far as I know, she doesn't have one
4) 401k / employer plan - none
5) Retirement date - 65 (unfortunately)

Since she has no emergency fund and the amount is not large (in terms of a tax hit - I doubt this will bump her into another bracket), I think a Roth IRA may be best choice.

Is it better to just put everything in Total Stock Market Index Fund (0.17% fee) or the appropriate Target Retirement fund (0.18% fee).  Since the fees are the same, it comes down to risk.  As this will also act as an emergency fund I am leaning towards the Target retirement fund.

Of course, if I find out she has 10K or more, than the expense ratio of the total stock admiral fund (0.05%) does make a difference and will lead to more thinking.

I plan on presenting these two - she'll need to make the choice herself - but what say you?  Would I be shortchanging her account growth by recommending the Target fund?

edit - clarity

bk1

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Re: Target date fund vs. VTSMX - recommendation question
« Reply #2 on: February 07, 2014, 09:04:21 PM »
I agree with the target retirement fund. If she wants set it and forget it and no ongoing involvement that is probably her best bet.

Ohio Teacher

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Re: Target date fund vs. VTSMX - recommendation question
« Reply #3 on: February 08, 2014, 07:26:39 AM »
I third the target date fund.  No re-balancing necessary as the fund will do it for you, so she can set it and and forget it.

Joel

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Re: Target date fund vs. VTSMX - recommendation question
« Reply #4 on: February 08, 2014, 10:04:38 AM »
It might be best to roll those dollars over to a traditional IRA. Make sure you know her exact tax situation and what adding those additions dollars of income would result in. Wouldn't want to be stuck with a tax bill that she can not afford.

vespito

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Re: Target date fund vs. VTSMX - recommendation question
« Reply #5 on: February 10, 2014, 01:57:07 PM »
Thanks all.  Just thought I would post an update.  Friend decided to go with Roth IRA - we did go over tax implications - she decided that long term this is what she wants to do and she has money to pay additional taxes for conversion.  Also went with the target date fund.  Only hiccup was the actual enrollment process online but a phone call to vanguard took care of that.  Now she just needs to send in the paperwork.  Thanks again for your feedback.

@Joel - I brought that up - I was very clear that there would be tax consequences and that I have no idea of what they will be.  Having said that, she will have not much income this year and the amount of the rollover was barely over $3k.
« Last Edit: February 10, 2014, 02:13:48 PM by vespito »