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Help me reach retirement before death
Interrobang!?
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Registered User regular
I have a nice little Roth IRA set up with Vanguard, and I make the maximum contribution to it every year (which isn't saying much, really, because I've only had it three years). So far I've only been putting my contributions into one fund—the "Vanguard Target Retirement 2045 Fund". This year, however, in the spirit of having a diverse portfolio, I think I'd like to dump my 5k into something else. But I know next to nothing about teh stock markets/investing, so I'm not sure what this something else would be. I'm thinking some sort of index fund, maybe...? How does one decide these things? Any suggestions for specific funds I might look into, or good places ignoramuses such as myself might go to research such things?
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It can pay off in the long run, but it's extremely volatile and there's no way to know exactly how much risk is attached to the investments you make. For the most part, the stock market provides a playground for millionaires and corporations to use insider trading and unethical tactics to squeeze money out of the American public.
I suggest annuities as an alternative.
You give a big chunk of cash to a finance company; they use it to make diverse investments, and give you a percentage return almost as high as the market average. You capture good returns, but it shields you from the direct market risks.
You can also leave the interest in so that it compounds over time, or after a certain time limit passes you can take out as much of the money as you want, even before you officially retire.
On the downside, you stand to lose your investment if the company makes too many risky investments and goes under - find a stable, long-standing company with a good financial rating.
Basically they find a risk bracket that is applicable to you and invest your money in certain things. This can be done for your retirement money or money that you want to access in 15 years time.
Many people will yell out that they charge a percentage for the money that you invest, which is true. But they also know what they are doing (which I don't) and offer a good return. They are no longer for people with fancy monocles and whatnot.
Satans..... hints.....
Thing is, your retirement fund is probably an indexed market fund. All that investing elsewhere is going to do is add a second dose of management fees to your fund.
The only thing thing that you should invest in other than an indexed fund is cash in a bank. The amount of money in that fund should reflect your belief that the stock market (as a whole) will go down.
Generally as a young person, 90-100% of your retirement fund in an indexed fund is the way to go - it's likely to go up and down a little, but over time should increase at a reliable rate. As you get closer to retirement, move more and more of your investments into cash funds - at that point you don't have the time to wait on markets to bounce back from any dips, so stability of your fund is more important than growth.
Not a financial advisor - but do hold an economics degree and know my way around actuarial math.
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Index funds are a great option too, they have extremely low expenses and over the long hall tend to do very well. you won't see any huge gains, but you should see fewer huge losses.
Investing is a game of time. The idea is compounding interest. Look at BankRate and use some of their calculators to see what i mean. Specifically this one
If you fully fund an IRA from when you are 20 to 30 and stop funding. you will have more cash at retirement then if you funded from 30 to 65. assuming an average rate of return in the market. Those last few years of compounding make all the difference.
Listen to Blanket. Get an advisor, they are not all equal so ask around and find some good recommendations. Yes they cost money, but it is a service. You are paying for their expertise. But don't just trust everything they say. be an active participant. do some reading and stay up on the news as well.
Personally, I believe that financial advisors are not needed unless you really have a ton of money or investments and could potentially lose track of them. Say you have a vacation house, a few cars, an old pension fund from one work place, some stock options you redeemed, a Roth IRA, a 401(k), and a couple others. And you're married and your spouse has some similar shit. OK, having a financial adviser to manage that type of portfolio is probably worthwhile.
But if you're just looking to dump $5k into a retirement investment each year, and that's the end of it? Just stick with the Vanguard Target 2045.
Incidentally the Vanguard Target 2045 is what I have. Over the past year it's beaten the market by a small percentage, and is a good place to put your money when you're young. The reason stocks are good when you're young is that you're poised to take advantage of the whole "risk/reward" thing. If you have $10k in savings and you don't need it for 50 years, you can afford risks because if you lose $3k for half a year, that's OK -- you don't need the money for 50 years anyway. And some of the risks may pay off and earn you money in the end.
But yeah, the more you try to do on your own, the more fees you hit which diminish your earnings. In a lot of ways, it's like trying to game the credit card industry by opening multiple cards and using balance transfers to avoid paying. You can do it for a while, and it's a lot of work to avoid it, but ultimately it catches up with you and you didn't really gain anything.
I briefly thought about financial advisers, but like EggyToast says, all I have is a Roth IRA, and all I'm looking to do at this point is add 5k to it every year. That's it. So I feel like a financial adviser wouldn't really be worth it at this point, but I'd definitely look into one when things start getting more complicated.
So it sounds like just continuing to put my money into the 2045 target fund I already have wouldn't be such a bad thing, but if not that then some sort of index fund would be a good way to go (except that it would mean more fees). So I guess what I'm curious about... is there an argument for investing in some sort index fund in addition to my current target fund, despite the fact it would mean more fees? Just so I don't have all my eggs in one basket, for diversification, or something...?
kedinik—Annuities sound worthy of some research. I'll look into learning more about those, if not for now then at least for future reference.
Thundyrkatz—Thanks for the links, I'll check those out when I'm not at work!
Assembling a diverse and productive portfolio certainly will help you to your goal, but there are other things you can do that will help also. Save more, even if you don't park it in anything more interesting then a savings account or a CD. Reduce your debt load, particularly high-interest revolving debt. Cut expenditures and be more thrifty.
There are a few factors I consider when picking a fund. Is the type/size of investment going to unbalance the total portfolio? Am I OK with the management fees or loads? Am I OK with the risk/reward that I think I'm incurring? Are there any trading restrictions? Is there an ETF that is substantially similar to this fund?
I would look closely at the equities/bonds ratio in the imminent target date retirement funds (e.g. 2015) and see if that asset mix jives with where you think you should be. These target date retirement funds are usually just baskets of other funds and they are reweighted on a regular basis as your target retirement date approaches. If you like the fund families but think the weighting is too aggressive or not aggressive enough you could always assemble your own basket of funds in the ratios you see fit (using the target date funds as guidelines), and reweight yourself. For example, the 2010 fund is 50/50 stocks/bonds, which sounds to me a bit overly aggressive when on fixed income (of course I'm biased as I expect Social Security payouts to be significantly lower when I retire).
Edit:
Target retirement funds are usually well diversified, and most index funds you could pick (other then total stock market index or a balanced index) are going to cause you to be less diversified. The argument for investing in a fund that would undiversify you is the same as the argument for actively managing your own investments: you think you can do better then a passively managed strategy, you perceive how the market is unfairly discounting something and you're actually right about it.
Annuities?! Wow. No. You don't know anything about investing and the advice you're giving here is just terrible.
Stock market is not a "playground for millionaires and corporations to use insider trading and unethical tactics to squeeze money out of the American public." That's just conspiracy theorist bullshit, and if they taught that to you in your Econ degree you should demand your money back (I can say this because I have an econ degree too.). Plenty of regular folks are able to make money off of the stock market by using rational, sensible strategies. If you invest in an equity index fund, that's basically a 6-7% annualized return after all the ups and downs are taken into account. You can balance out that risk by investing in bonds as well.
OP, the Vanguard Target Retirement funds are already diverse enough. The way they work is that they start with an aggressive portfolio (mostly stocks, and a small amount of bonds) and become more conservative as the target date approaches. So there is no need to place your contributions into yet another account to diversify further. That might actually be counter-productive by introducing more expenses.
Take a look at the personal finance thread in D&D, and when you get a chance, buy this book. It's excellent and dispels many myths about the stock market and investing in general. It's a great book for both new and experienced investors.
You might also want to check the Bogleheads Wiki and create an account on their forums for future education and individualized advice.
Annuities can be very tricky. Be sure you fully understand what you are signing up for. it is not unusual for them to be very high in front end and back end fees, and your cash could be locked up for a while. I usually only recommend an annuity if all other tax advantaged avenues have been exhausted and you still have excess cash.
Yes, but not necessarily. Vanguard in particular is known for its extremely low expense funds. The 2045 fund has an expense ratio of 0.20%, which is amazing.
I have a job that is stable enough, but it's never going to make me wealthy. They have a history of beating the market, and they have some stocks that went up 900 or 1000 percent five or ten years after they recommended them. Shit, all I need is $1000 in ONE of those and I'll be set for life. I realize that it's pretty much gambling, but they only recommend fundamentally sound businesses and I never put everything into one of them, so overall I'm comfortable with it.
Your target fund is already focused on an index fund. Think of it this way -- it's good to be diversified, because you reduce the risk of getting wiped out. So, if you can, it's best to buy shares in a lot of different companies. The S&P 500 contains 500 different companies -- that's a LOT of stocks, and the fees for owning a part of each one would be significant. So it makes more sense to simply buy stock in the index fund, which automatically gets you diversified.
Like I said, I have the Target 2045 and if my memory serves me correctly, it's a mix of index funds, high growth stocks, and a small amount of bonds. Already your money is diversified and not in one basket, and the only risk you current carry is if Vanguard disappears, which is pretty unlikely. They're a pretty smart investment group, in my opinion, and it'd be kind of silly if you decided to put your money in another mutual fund that did the same thing but had higher fees, because that kind of diversification doesn't help you.
2 Vanguard Total Bond Market II Index Fund Investor Shares** 10.0%
3 Vanguard European Stock Index Fund Investor Shares 8.8%
4 Vanguard Pacific Stock Index Fund Investor Shares 4.8%
5 Vanguard Emerging Markets Stock Index Fund Investor Shares 4.5%
You, sir, are the most diversified man in the world (well, you and all other world-wide index fund owners - and I suppose you would need to mess around with foreign bonds to really claim that title).
As you get closer to retirement age, the fund will convert into more and more bonds (which is good - they typically have lower returns but are less risky). If you want, Vanguard does have a TIPS fund (US Treasury inflation-protected bonds).
It is exactly gambling. Past performance is no guarantee of future performance. In fact, most funds follow a Return-to-Mean (RTM) statistic - the ones that do very well in one decade usually do very badly in the following. It is almost impossible to beat the market consistently, and the fund managers who have done so are so rare that their success might as well be attributed to pure luck.
The book I linked earlier has done an excellent job documenting why trying to predict stock/fund success is absolutely futile.
These things here. DO NOT LISTEN TO THEM. Investing in individual stocks will make you lose your money. Investing in anybody claiming to 'beat the market' will lose your money (either through massive fees or them actually losing your money).
The best way for anybody to beat the market is to encourage more suckers into the market and exploit their predictability. Unless you're the most powerful force on the market, you are one of the suckers.
There are people whose entire job is trying to beat the market. They are backed by large amounts of money and are protected from the risk because the money is not their own. The are called investment bankers. If you think you're smarter and have more financial power than all of the investment bankers on the market, invest in individual stocks. Also, I have a bridge for sale.
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Index funds are a pretty safe bet for about 6% annual returns and they're usually a good retirement tool, but there's still the realistic possibility that a severe, ill-timed crash will delay your retirement by many years.
Most annuities are bad long-term investments, but you get much higher guaranteed minimum rates when the economy's booming; that's when you can find some really good deals.
For instance, a little over a decade ago my co-worker locked in an 8%-minimum-return annuity that adjusts as high as 14% depending on the state of the market. That's as good of a long-term investment as you can ever find for the (negligible) risk attached to it.