Thursday, April 17, 2014

Three Little Words

I am passionate about my investments. I want to understand and control what I am doing with my money. I don’t feel that way about everything. I don’t want to understand my income taxes. I want to cover my eyes and make loud noises so I can’t hear or see what is happening to my money. Thank heavens for my CPA. Sometimes it is hard for me to understand that there are people out there who not only don’t understand investments, but don’t want to understand investments.

I have three words for people who don’t want to understand their investments, “Vanguard Lifecycle Funds.” There are now low cost offerings from other companies that compete with the king of low cost funds, but before you invest in anything make sure you compare it to what Vanguard is offering.

Lifecycle funds choose a balanced age appropriate mix of investments on your behalf.

Let’s take a look at the Vanguard offering for folks who are looking to retire in 2045, people age 32 to 36.

Vanguard Target Retirement 2045 Fund (VTIVX)

Minimum Investment: $1,000 (Normally, Vanguard’s house minimum is $3,000)

Management fees: 0.18% (Really Cheap)

12b-1 fees: None (If anyone tries to sell you a product with 12b-1 fees, run away.)

Purchase fees i.e. sales commissions: None. Zero. Nada. Halleujah!

Redemption fees: None

Account Service Fees:

Simple IRAS: $25 a year
403(b)7 Plans $15 a year
Individual 401 (k) Plans $20 a year

Nonretirement Accounts, Roths, traditional IRAs, SEP-IRAs, UGMA/UTMA, and ESAs $20 annual service fee for each fund with a balance under $10,000. This fee is waived if you choose electronic delivery of all correspondence.

Fees are a very important factor in determining the ultimate quality of your investment. If you are giving a salesman more than 5% of your investment up front, it is very difficult to ever recover that money no matter how astute the fund manager.

Now, let’s look at what they are giving you for your money, a nice aggressive package for folks in their early thirties that covers the entire U.S. stock market, a healthy dose of foreign markets, and some reserves in bond funds. I would be a bit more conservative, but I don’t have any problems with their selected mix of funds.

1 Vanguard Total Stock Market Index Fund Investor Shares 62.9%
2 Vanguard Total International Stock Index Fund Investor Shares 27.1%
3 Vanguard Total Bond Market II Index Fund Investor Shares 8.0%
4 Vanguard Total International Bond Index Fund 2.0%
Total 100.0%

Of course if your company offers a 401(k), that is where you want to start your savings program. If you want to start saving for some kind of long term goal, but you don’t want to spend the time and effort to manage your own money, consider the lifecycle fund. If you automate your savings with monthly debits that increase over time as you gain confidence in putting your money at risk and as your income naturally increases over time, you should be in good shape when you reach 65.

Your ultimate target for retirement savings is 15% of your pretax income into tax favored accounts. Normally this would be a 401(k) and a ROTH IRA. Start small, gradually increase the percentage every time you get a raise, you will get to 15% if you persevere (really).

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