Regular readers of The Simple Dollar are aware that I’m going through the process of starting my Roth IRA. For those unaware, so far I’ve decided to start a Roth IRA this year, found a company (Vanguard) that I’m comfortable with as a manager, developed a detailed plan for making it happen this year, and looked at some of the Target Retirement funds that Vanguard has to offer.
Over the last week, however, I’ve been strongly considering the possibility of managing the funds of a Target Retirement fund myself within my Roth IRA. For example, if we look at the Vanguard Target 2045 fund, we see that it’s currently made up of five separate funds: four stock funds (Total Stock Market (about 72% of total holdings), European Stock (10.5%), Pacific Stock (5.0%), and Emerging Markets (2.7%)) and a single bond fund (Total Bond Market, about 9.9%). Since Vanguard provides this information on their website, wouldn’t it make sense to approximate their holdings and just balance the whole thing myself, saving myself another layer in fees?
There is one little problem: each of these funds has a $3,000 minimum, which means that in order to hold the Emerging Markets fund at that exact proportion of the portfolio, I have to invest $110,000 or so in the Roth IRA. At a rate of $4,000 a year, that’s basically saving until retirement just to match their balancing.
So I took their numbers and rebalanced it a bit. Instead of their proportions, my retirement fund would be roughly 50% Total Stock Market, 20% European Stock, 10% Pacific Stock, 10% Emerging Markets, and 10% Bond Market. Given that I would put the minimum $3,000 into the 10% funds, I would need to have $30,000 to build this portfolio, or seven and a half years of Roth IRA contributions.
So, here’s my plan for investment. In the next seven and a half years, I’ll do the following:
Year 1: Put my entire $4,000 allotment into the Total Stock Market Fund. I still have $11,000 to go for that one in the next six and a half years.
Year 2: Put $3,000 in the European Stock Fund (leaving another $3,000 to go over the rest of the period) and another $1,000 into the Total Stock Market Fund (leaving $10,000 to go).
Year 3: Put $3,000 in the Pacific Stock Fund (fully funding it until I’ve reached the “balancing” stage) and $500 each in the European Fund ($2,500 to go) and the Total Stock Market Fund (another $9,500 to go).
Year 4: Put $3,000 in the Emerging Markets Fund (fully funding it until I’ve reached the “balancing” stage) and $500 each in the European Fund ($2,000 to go) and the Total Stock Market Fund (another $9,000 to go).
Year 5: Put $3,000 in the Total Stock Market Fund (leaving $6,000 to go) and $1,000 in the European Fund (leaving $1,000 to go).
Year 6: Put $3,000 in the Total Stock Market Fund (leaving $3,000 to go) and $1,000 in the European Fund (fully funding it until I’ve reached the “balancing” stage).
Year 7: Put $3,000 in the Bond Market Fund (fully funding it until I reach the balancing stage) and $1,000 in the Total Stock Market Fund (leaving $2,000 to go).
Year 8: Put the final $2,000 in the Total Stock Market Fund, and “balance” the rest.
Basically, the “balancing” phase means that I’ll match contributions into each fund to make my amounts in each fund best match the current proportions of the Target Retirement 2045 fund. In essence, I would keep investing in the proportions I had set up (5:2:1:1:1, or slightly more into the smaller ones depending on minimum monthly contribution limits) and pretty heavily shift that contribution into bonds as I enter my 40s and 50s, effectively balancing my portfolio using my contributions.