(Continued from Should I roll over my 401k? Part 2 – Maybe Rollover into Fidelity?)
I believe in the power of low-cost investing in well-managed index funds, as proposed by books such as Random Walk Down Wall Street and Four Pillars of Investing. So here’s what I’m considering if I roll over my 401k to a Vanguard IRA. I would probably merge it will my existing Traditional IRA there, leaving me with a balance of around just over $20k.
Option #1: One Fund
Right now my IRAs only hold one fund: Vanguard Target Retirement 2035 (VTTHX), and my wife’s hold the Retirement 2045 Fund (VTIVX). I did this do get a balance of about 85% stocks, 15% bonds. I feel I should be closer to 90% stocks, so I could put everything in the Traditional IRA into the 2045 fund. That would leave me with the following allocation:
Vanguard Target Retirement 2045 Holdings:
71.0% Vanguard Total Stock Market Index Fund
12.4% Vanguard European Stock Index Fund
5.3% Vanguard Pacific Stock Index Fund
11.1% Vanguard Total Bond Market Index Fund
Pros: No fees at all if I keep the balance above $5k. No additional expense ratio charged above the underlyings funds. Expense ratio is a lean 0.21%. No Trading costs.
Cons: I don’t get to chose when or how much to reallocate as I get older. One size may not fit all.
Option #2: 3-4 Funds
I could also do something similar to the above fund myself by buying similar underlying funds in the ratio of my choosing, a la the Four Fund Portfolio. Here’s
70% Total Stock Market Index Fund (VTSMX)- ~$14,000
20% Total International Index Fund (VGTSX)- ~$4,000
10% Total Bond Market Index Fund (VBMFX)- ~$2,000
Pros: I can reallocate easily later on as I see fit, or add other funds. No trading costs.
Cons: I will get charged $20/year each for the low balances in VGTSX and VBMFX, for a total of $40/year (Vanguard fee explanations). Not that bad, but this can also be seen as an additional 0.20% expense ratio for my $20k balance (Note: The fees can be pre-paid with non-IRA money).
If I tweak the percentages to put $5k in VGTSX, I can get the fees down to $30/year. Or I could drop the bond fund totally, and get it down to $10/year.
Option #3: Do it all with ETFs
I’m relatively new to ETFs, although I own a couple, like VNQ. Vanguard now has a lot of good ETF (they called them VIPERs) options. With ETFs, I can slice and dice as long as I pay the commissions. Commenter Sue mentioned BrownCo, which offers $5 trades and no inactivity or low-balance fees. Here’s a quick possiblity:
40% Total Stock Market VIPER (VTI)
20% Extended Market VIPER (VXF)
10% European Stock Idx VIPER (VGK)
7% Pacific Stock Idx VIPER (VPL)
3% Emerging Mkts Idx VIPER (VWO)
10% iShares Lehman Aggregate Bond ETF (AGG) (Can’t find a Vanguard Bond ETF)
Pros: Somewhat lower expense ratios. No maintenance fees, depending on broker. More flexibility.
Cons: Will pay commissions when trading and re-allocating. Need to find a new broker. If I get $50,000 in overall funds with Vanguard, I will be able to waive all low-balance and IRA custodial fees. But in order to stay with Vanguard, I will have to pay $25 for trades.
As I’m writing this, I’m more and more interested in ETFs! I have a big chunk of money, so the commissions shouldn’t be that big a deal, and it’s true that I’m not really dollar cost averaging, at least right now…
*All the funds mentioned above are no-load funds, with no 12b-1 fees.
(Read the last part, Should I roll over my 401k? Part 4 – Final Decision)