Roth IRA: Target Retirement MF to Individual MF's?

[kork13]

Considering a move, so I figured I would get a second opinion with you all. I've been looking at my accounts recently in what I'll call a "semi-annual review", and in this case looking specifically at my Roth IRA (held with Vanguard). I currently have my Roth IRA 100% invested in their 2050 Target Retirement Fund, which I've been happy with -- I like its simplicity, both in owning it (only one MF to invest in & manage each month) and in its underlying funds (only contains 4 of Vanguard's in-house index MF's). The 2050 fund has a total expense ratio of .17%, which honestly is quite good.

These are the 4 underlying funds in the 2050 Target Retirement Fund (weight in the fund / expense ratio)
VTSMX - Total Stock Market Index Fund (Investor class) (63% / .17%)
VGTSX - Total International Stock Index Fund (Investor class) (27% / .22%)
VTBIX - Total Bond Market II Index Fund (Investor class) (8% / .12%)
VTIBX - Total International Bond Index Fund (Investor class) (2% / .23%)

What I'm looking at is if I should move my Roth IRA money from the 2050 fund into individual funds, including moving the stock funds into the lower-cost Admiral funds. I know the transactions would be totally tax-free being within the Roth IRA, and I'm grateful to not have that complication. So basically I'd be looking at changing my Roth IRA's allocation from 100% 2050 fund to:

VTSAX - Total Stock Market Index (Admiral class) (65% / .05%)
VTIAX - Total Int'l Stock Index (Admiral class) (25% / .16%)
VBMFX - Total Bond Mkt Index (Investor class) (10% / .20%) **I would upgrade this to Admiral class (.10% ER) once balance hit $10k
VTIBX - Total Int'l Bond Index (Investor class) (0% / .23%) **minimum investment is $3,000, so 2% of my Roth IRA would only be $1,000)

After some number crunching, making this change would reduce my effective expense ratio for my Roth IRA from .17% to .10% -- a 41% reduction in total expenses. This leads to my overall question: Is the reduced cost of making the change worth the trouble of managing the extra funds?

I guess my other option would be to simply delay making this change until I had a more substantial Roth IRA balance to worry about. At present, I'm 27 y/o, so my Roth IRA only has about $50k in it -- my savings from the reduction in total expenses for the Roth IRA would only come to about $40/yr.

Just looking for your input and ideas, if you think making the change now is worth it, if I should wait a little while, or simply not bother at all and just keep what I've got.

[bjl584]

If the performance of the funds is comparable to the 2050 fund, and you are willing to actively manage the account, then saving the 41% in expenses seems worth it.

If you just want to "set it and forget it" then moving into those funds may be more hassle than it's worth.

[feh]

After some number crunching, making this change would reduce my effective expense ratio for my Roth IRA from .17% to .10% -- a 41% reduction in total expenses. This leads to my overall question: Is the reduced cost of making the change worth the trouble of managing the extra funds?

This is a question only you can answer. You've hit upon the one disadvantage of horizon funds - they have a slightly larger ER than if you handle things yourself.

Will you rebalance diligently? Will you stick with your asset allocation in tough times?

A couple comments:

• every penny in fees saved will compound; makes a big difference over time
• I wouldn't bother with the int'l bond fund; without it you have the classic 3 fund portfolio

[kork13]

One note on "the one disadvantage of horizon funds" -- The 2050 fund actually has the same effective ER as a portfolio of the same underlying funds... The difference in cost is that I would have enough invested to take advantage of Vanguard's Admiral funds, which cuts the ER's down almost in half. Once I have enough in the bond fund to qualify for that Admiral fund, my overall ER would drop even further to about .085%. Definitely a fan of Vanguard's low-cost index funds!

I guess all of that is what I've been thinking as well, and really there's no impediment to my switching to the 3-fund strategy. I already monitor & manage my taxable investments (invested a little differently), and have done so for the last 7 years, so balancing & sticking to my allocation would be no problem really.

Good point about the international bonds, I was actually surprised to find them in the 2050 fund. I probably won't bother with them, at least for now.

I suppose all I really needed was some confirmation that it made sense, and you guys have more than done that for me... I suppose it was really a bit of a silly question, but I think even just typing it out and thinking it through helped me arrive at a decision. Thanks for the assist.

[MatthewC]

Hi kork13,

Here is my take on this:
.07%, that 41% that you are considering saving, will save you just 70 dollars on every 100,000 dollars that you have invested there. If the investments return similar amounts, would you rather spend all the time on it yourself, or perhaps put in a day of overtime or save up the 70 dollars per 100,000 and put it in to compensate? Because if you are looking at your account for 10 minutes a day, 5 days a week, that comes out to 2600 minutes a year, or 43 hours and 20 minutes. So you're paying, what? $1.62 an hour for each 100,000 invested for the time that you have saved? Personally, I like to think that my time is worth more than $1.62 an hour and I bet you do, too.

On a side note, how about I make a portfolio simulation for you? I'll generate a list of stocks, give it to you, and you can hold onto the list I give you for a year to "see how it would have done". No risk to you, but you might just find that when you compare it to how those funds perform, you might like my portfolios better.

[ktmarvels]

Your post prompted me to consider switching my funds from the target fund to doing it myself. Our numbers are very similar to yours. My husband was wondering how much it would actually be saving for the more work of having to rebalance the portfolio ourselves. Using a rough calculator it will end up saving us over $10,000 over 30 years by managing ourselves. Far worth the 2-3 times a year it will take to rebalace the portfolio. So we made the plunge. Have you?

[kork13]

Your post prompted me to consider switching my funds from the target fund to doing it myself. Our numbers are very similar to yours. My husband was wondering how much it would actually be saving for the more work of having to rebalance the portfolio ourselves. Using a rough calculator it will end up saving us over $10,000 over 30 years by managing ourselves. Far worth the 2-3 times a year it will take to rebalace the portfolio. So we made the plunge. Have you?

I haven't made the change yet, but I have pretty much decided to go through with it. I normally re-balance my investments each January anyway, so I figure I'll take care of it then.