Is This Retirement Investing Strategy Smart?

September 13, 2023

Index target date funds are made of indexes that you can add to your own portfolio. Is it a good idea to build your own target date fund to circumvent fees and expenses?


Kyle’s question is up next. It says, “How do you guys feel about copying Target Date retirement funds to use as our own retirement plan, following along with Vanguard or Fidelity, etc., for your date so we can circumvent expense ratios? Or should we make our own three-fund?” This is some creativity, and I want to know what you guys think.

I mean, I guess you could, right? Like, I guess you could. Not very enthusiastic. I’ll start this one because you do such a good job of framing stuff, but I’ll let you because you can have the closing points on it. But I think about this client who we were like, “Man, you’re at the station of life; you ought to hire a tax preparer to make your life easier because it’d just be better if you take some of that off your plate and focus.” Then found out she was still doing her tax but then giving it to prepare and then quizzing the CPA on how they prepared it. This is Kyle. This is the exact same thing.

And I want to remind you, part of what you’re doing in your journey is you’re trying to allocate time and resources to what can add value. If you’re wasting your calories, if you’re wasting your mental horsepower on things that could be done that you’re already paying for, it just seems really wasteful. And that’s what I’m thinking. What could that time that you’re allocating between trying to recreate, because yes, it’s true, you can go to morningstar.com, you can go see what funds are making up the Target retirement fund, you can recreate it. So, then every year as the glide path takes you from super aggressive while you’re in your 20s all the way down to a pretty conservative portfolio by the time you’re in your 60s, I guess you could every year go in there and see what percentage that it all changed in those five-year bands.

But why would you do that? That’s like… that’s like, you know, you have a washing machine and a dryer, and then you’re saying, you know what, not using the dryer anymore, I’m going to go string it up across the backyard. I know some of you like the smell of my linen drying, but don’t miss the point here. I’m just saying don’t get caught up in an exercise of wasting calories. I want you to be very purposeful so that you can own your time sooner because that’s what money really is, is time. The sooner, ’cause right now while you’re younger, you are trading your time to put into labor so you can get paid for that. And I’m just telling you to turn that equation around, to build wealth as fast as possible so you now own your time and you do things on your terms. This is the part I wouldn’t waste effort on, on trying to recreate. I would join in with it, spot check it from time to time to make sure you agree that it aligns with your goals, but then go use that time savings to find other ways to either be fulfilled with your life that you’re creating or accelerate your path to creating independence.

Yeah, I love that because if you think about it, when do Target Date funds make sense? They really make sense early on in your accumulation journey. So, before your assets hit what we call critical mass, right? Critical mass is probably $400,000 or $500,000, somewhere in that threshold. A Target Date fund is a fantastic solution. Well, you mentioned Vanguard. I didn’t mention Vanguard; you mentioned Vanguard. I went and looked; the Vanguard Target Retirement 2050 fund has an 0.8% expense ratio. It’s practically free; you’re paying almost nothing for that. So, you can figure out whatever your portfolio is, times that expense ratio, might be worth it. You’re like, “Oh, well, it’s more conservative than I want it to be.” Okay, pick a farther out date. Pick a more aggressive one. There’s nothing wrong with doing that because I would contend, just like Brian said, your time is going to be spent so much more figuring out, okay, how can I increase my income, how can I increase my savings rate, how can I do those sorts of things, so that when I do hit that $400,000, $500,000 mark, instead of trying to go replicate a Target Retirement fund and trying to do that, I’m going to have the “Bo” fund. Yours won’t be the “Bo,” mine would be the “Bo” retirement fund. I’m going to move from this generalized solution that works for people kind of in my situation to now I’m going to have a portfolio that matches exactly what I want – my risk tolerance, my risk capacity, my goals, my savings, my time horizon, all those specific pieces that a Target Retirement fund does. Until you get to that point, don’t waste the calories; don’t lose the plot if you’re doing that. So, I think that while it could be done, I don’t know the cost savings are really going to be worth it. Work smarter, not harder. I mean, that’s just not a good use of your resources if you’re just duplicating something that could be pretty much given to you. For more information, check out our free resources.



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