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Ottakee

New to a 403(b)---15 years from retirement

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I am a new school hire (but a previous public school employee).  I have an old pension plan from the schools that started in 1989 that I will continue contributing to.  I also have a ROTH IRA and personal investments through Vanguard.

I need to figure out the best funds to put my 403(b) into.  It will amount to about $6500/year but is starting from scratch.  The management company charges 0.50% plus any expense ratios from the funds I chose.  No other annual fees, etc.  They offer quite a few Vanguard funds to chose from including Target retirement funds, VTIAX, VTSAX, VBLTX, VFIAX, and many others.  They also offer some actively managed funds.

How do you chose the best ones?  Since I have other retirement savings, I do have the ability to take on a bit more risk but yet I will be accessing the funds starting in 15-20 years.

What % of stocks vs. bonds should I look for?  Is it better to "do it yourself" with the much lower expense ratios of the individual funds, or just pick a higher expense ratio of a 2035 or 2040 target fund?

I will be fulling funding my ROTH IRA as well and there are other reasons why I need to put the money into a 403(b) for now vs. other investments.  I just need some guidance on the best funds to look for.

Thanks.

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You didn't mention your age, but from the information given I'm guessing maybe early 50's?  At that age most people would recommend a stock/bond asset allocation of somewhere between 50/50 and 75/25 depending on your risk tolerance.

How much more expensive is the target date fund you are considering than the vanguard total stock market fund (VTSAX)?  The difference between my 2025 TDF and VTSAX is only 0.14 - 0.04, so I use the TDF in my 403B for the convenience.

As far as which funds go in which account, I like the following rules of thumb.

   1.  Highest risk funds (stocks) with the most potential for long term growth go in the Roth IRA.  The reasons being you won't need it for a long while and the (hopefully large) gains won't be taxed.

   2.  Bonds, including those in a target date fund, are better in your tax deferred 403B.  Bonds kick out a lot of dividends that would be taxed as ordinary income if you don't have them in a tax advantaged account.  In tax deferred you have control of when you pay the taxes.

   3.  In a taxable (brokerage) account you also want tax efficient funds like VTSAX that don't pay out a lot of distributions.  What else you have here depends on how long until you need it and personal preference.  Besides VTSAX, I also have some VTIAX for foreign exposure, and also some total bond market (not too efficient) and a money market fund.  I'm sacrificing tax efficiency for liquidity, because I will want to spend some of this before age 59.5.

 

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16 hours ago, Ottakee said:

What % of stocks vs. bonds should I look for?  Is it better to "do it yourself" with the much lower expense ratios of the individual funds, or just pick a higher expense ratio of a 2035 or 2040 target fund?

That's the million dollar question.  The advice you just received is a good start. I will simply add my two cents.

Your age in bonds is always a good way to go if you are uncertain  of allocations and wish to do it yourself. In that case all you would need is maybe 3 funds. Total Stock Market Index, Total International Index plus an allocation to bonds based on your age. It will be cheaper if you do it yourself. So if you are 50 you could go 50% Bonds 25%  Total Stock Index and 25% International. Your age in bonds is a general suggestion and can be adjusted if you wish to be a bit more aggressive.

BUT. It is still a great value  although a slightly more expense ratio ( not that much more)to go into a Target Fund or a Life Strategy Fund and let the fund manager do all the work for you deciding which allocation is best at your particular age and time before retirement.

Personally I'm retired and I LOVE the Vanguard Life Strategy Funds concept because I don't have to lift a finger. and I know my allocation will be maintained without me messing with it. Being hands off  has its advantages. Most hands off investors do better than most  who self manage their accounts and make changes sporadically and emotionally. Check them out and see if you might have access to them in your 403b. The difference between the Vanguard Life Strategy Funds and  their target funds is that the LSFunds stay static in allocation while target funds change as you get older.

https://investor.vanguard.com/mutual-funds/lifestrategy/#/

Tony

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Thanks. I do have access through my 403B to the Target date funds as well as the Life Strategy Funds....and the  VTSAX, VTIAX.  Is it really advantageous to "to it myself" over a Target Fund or Life Strategy Fund to save the small amount in expense ratio?

I see myself being more risky for the next 5 years or so and then dialing down the risks as I am starting from zero in this account and I have other money I can access earlier if needed.

 

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I think it is useful to address some deeper more fundamental questions than just the ones you asked.

If the vendor is charging 0.5% on top of whatever they’re charging for the funds, this isn’t a very good plan. So it would be in your best interest to identify every 403b and 457b vendor your district has approved. Some states have state sponsored 457b plans that are relatively good and sometimes great. Come back and post your options and I can give some further guidance.

I think you’d benefit from reading the Investing 101 page because it hits on several of the topics you’re asking about.

With respect to which funds you should buy, you definitely want total market index funds because they’re really low cost and fully diversified (that’s how you pick a fund). The following three will give you a fully diversified portfolio: VTSAX, VTIAX, and VBTLX. However, you want your portfolio as a whole to meet your asset allocation, so which funds you should buy and in what percentage depends on what funds you own in your other accounts.

It isn’t “correct” to say that having other retirement accounts means you can take on more risk in this account. Everybody has a specific amount of risk they’re comfortable with and their overall portfolio should always reflect that. If you decide to be “more risky” in this account it means one of two things: your other accounts were too safe to begin with or you’d be taking on too much risk.

In my view you should recognize that stocks can lose approximately half of their value very quickly and take years (maybe even 10+ in a terrible scenario) to recover. However, stocks have a higher expected return in the long term. You want to own as much stock as you can such that when a crash does happen you keep buying stocks and you don’t do something foolish like sell. Having said that, only you know what that percentage is.

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...you’re playing illogical mental account games by thinking you can treat one pot of money differently from another pot in terms of risk appetite. It is a dangerous game that lots of people play and it doesn’t make mathematical or logical sense.

Yes, in my view it is “worth it” to buy the individual funds instead of an all-in-one fund. However, if you’re the type of person who won’t keep buying the under performing asset class or won’t/can’t take take the minimal time to understand what you’re supposed to do and then actually do it, then I’d strongly recommend and all-in-one fund to protect you from yourself.

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23 minutes ago, EdLaFave said:

I think it is useful to address some deeper more fundamental questions than just the ones you asked.

If the vendor is charging 0.5% on top of whatever they’re charging for the funds, this isn’t a very good plan. So it would be in your best interest to identify every 403b and 457b vendor your district has approved. Some states have state sponsored 457b plans that are relatively good and sometimes great. Come back and post your options and I can give some further guidance.

 

It is the best they offer.  I know it isn't the best but still better than my other options.  We only have a few vendors to chose from.

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3 hours ago, Ottakee said:

Thanks. I do have access through my 403B to the Target date funds as well as the Life Strategy Funds....and the  VTSAX, VTIAX.  Is it really advantageous to "to it myself" over a Target Fund or Life Strategy Fund to save the small amount in expense ratio?



 

On a $100,000 account there is a hundred dollars difference in annual cost between VTSAX and most of the Target date funds.  You decide if it's worth it.  As the size of the account grows, owning the funds separately might become more desirable.

 

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Just seeing this thread now. If it's not too late to jump in:

Ottakee, in my view you don't need to fret about the investing choices in this account, just consistently fund it (that .5% fee is obnoxious, but such charges—and worse—are very common in the 403b world).  All the investment options you are considering are reasonable.  You are starting with zero in this account and expect to retire in about 15 years.  At that point (or at age 59 1/2, whichever comes first) you should roll these funds into an IRA account to get rid of that added fee.  (It probably makes sense to open an IRA at Vanguard, so that you can eventually consolidate your accounts in one place.)

Individual index funds are the most cost efficient, but I wouldn't hesitate to go for a single Target Date fund if you are attracted to the simplicity and automatic rebalancing that comes with that.  The cost difference is probably less than one tenth of a percent per year--over fifteen years or less in an account with four-figure annual contributions, that expense ratio won't make a meaningful difference in your retirement nest egg. 

It sounds as though you are doing really well--do I understand correctly that you will be paying into a pension system for about 45 years?  Pension plans vary, but that could mean a substantial guaranteed retirement income.  If it is large enough (or if you also qualify for Social Security), you may not need to touch much of the the 403b/IRA money for income.  I would consider your overall financial picture (include projected pension income) when deciding on your stock vs bond allocation for the long term.  But get started funding this new account now, with pretty much any diversified Vanguard fund--you can always make changes or additions at a later date.  The amount of money you are putting to work is ultimately more important than the nuances of fund types and fees.

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Ottakee, as Ed has suggested, it might be a good idea for you to list your district’s 403b vendors. It’s sometimes the case that a high cost vendor offers a very low cost option that is easy to overlook. 

Also Ed’s suggestion to consider a low cost state run 457 plan rather than a relatively expensive 403b plan is a very good idea. What state are you in? It’s often fairly easy to get a district to add the state 457 plan if it’s not already offered. 

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Welcome Ottakee, and thank you to all of the great posts from everyone. 

 

MN Gopher - Do you have a link to that chart?

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2 hours ago, Admin said:

Welcome Ottakee, and thank you to all of the great posts from everyone. 

 

MN Gopher - Do you have a link to that chart?

Yes, the first is a link to the image from the Bogleheads website. 

https://www.bogleheads.org/wiki/File:Slide2.JPG  

And this one is an article and 5 minute video that explains it.

https://financinglife.org/learn-how-to-invest/tax-advantaged-accounts/#transcript

 

 

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Coming back here again.  I just got the MRIC (Michigan Retirement Investment Consortium) fees and expense report card Friday.

My Midwest Capital Advisors with their 0.45% asset fee is the best there is for me right now.  They also offer Vanguard funds so I can at least chose very low expense ratio funds.
 

Right now I am investing almost $7000/year into my 403(b) account which is a Vanguard target retirement.  I am also maxing out my personal ROTH account directly through Vanguard.

My question comes in that I have a sizeable amount in a brokerage account directly with Vanguard.  Would there be an advantage to selling some of that to live on and then putting a corresponding amount (say $7000/year) into a ROTH 403 account?  The advantage I see is that right now, I am in a very low tax bracket and that would move my money towards a tax free account for retirement when my taxable income will likely go up.  The con though is that I would have to pay that pesky 0.45% fee on top of the Vanguard fees I am already paying now.  Any thoughts on this?

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2 hours ago, Ottakee said: Would there be an advantage to selling some of that to live on and then putting a corresponding amount (say $7000/year) into a ROTH 403 account?  The advantage I see is that right now, I am in a very low tax bracket and that would move my money towards a tax free account for retirement when my taxable income will likely go up.  The con though is that I would have to pay that pesky 0.45% fee on top of the Vanguard fees I am already paying now.  Any thoughts on this?

I think your proposal makes sense. Hopefully you can sell in your brokerage account without having to pay any (or not much) capital gains tax? If your income plus any capital gains don't push you out of the 12% bracket, your capital gains will be taxed at 0%.

If you're currently contributing to the brokerage account for retirement, instead I would max out the 403b before adding to the taxable account.

Is the 0.45% administration fee the same for each of the 6 vendors in the Consortium? I don't think the 0.45% admin fee should influence you decision to max out the 403b account, or to go Roth on half of your contribution. 

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