Target date funds for roth iras?

Question

i was wondering if anyone had any feedback on whether its worth it getting into the target date funds(2040) with vanguard, and once u sign up for the target date funds how hard is it to switch back to picking your own mutual funds and what exactly r u charged to do so.... thanks for your help,

Answer 1

There is no fee for switching and you can do so by making a phone call or even over the internet.  The purpose of the target date fund is just to relieve the IRA account holder from the burden of having to pick and choose investments and the burden of reallocation of investments over time.  The advantage of the Target date fund is its low expense ratio.  The disadvantage is that the allocation is skewed towards the total market index fund, a somewhat lopsided allocation in that although the fund is invested in 3500+ stocks most of the money is invested in large cap U S companies.  The rest is more or less window dressing. Although most would agree that most of ones investments should be invested in large cap companies, I am not of the opinion that it should be based on market cap. Just because a stock is overpriced is not reason to be investing in it.

Answer 2

I think the T.Rowe Price target funds are a bit better. The differennce is the Vanguard target funds use index funds. The T. rowe Price uses managed funds.

Both companies allow easy transfers to other fund within their family.

Answer 3

You can save yourself a quarter point in expenses by handling it yourself.  Have a look at your 2040 fund.  I am guessing that it invests 80 percent in equities and 20 percent in fixed income (bonds).  The fund changes allocations every few years to reduce your exposure to equities and puts you more into fixed income.  So by 2040 you are 80 to 100 percent in fixed income.

I mentioned that you can save a quarter point by doing it yourself.  You could buy the S and P 500 with expenses of  .17 or less.  You could get a World Index fund carrying a .4 expense fee.  Then you could get a bond fund with .4 or so as well.  You could adjust your allocations over time, just like the "Target Funds do".

Your cost for trading depends on your status with your broker.

Some companies charge based on your trade status or level.

Other companies offer one price, whether you make 5 trades a year or 500(This is me and it can get costly).

A roth is a great vehicle for building wealth.  I definitely think that index funds have a place in every portfolio, but I was wondering if you thought about owning some individual stocks in there?

The market is giving away some great companies right now with dividends to boot.  Look at Bank of America and Citigroup are just a couple of examples.  You have the possibility of capital appreciation WITH dividends that you can either keep the cash or buy more shares.  You have over thirty years till retirement, so it might want to be something that you think about.

Good Luck!

Answer 4

I don't think there are any back-end fees, necessarily, for switching....but it would be an astonishingly silly thing to do!

The whole POINT of a "target date"-type fund is that your asset allocation is automatically re-balanced by the fund as time passes, usually based on the last 200 years worth of data, to maintain the optimum balance between investment vehicles for an individual planning to retire on that particular target date.  If you don't trust history, you shouldn't be in a target date fund; if you DO think that people are basically as fearful & greedy as they have always been, then you should leave your money in such a fund and let software & history maximize your return!