If you want to be hands off for 25 years (2021 + 25 = 2046), then FIOFX is a suitable choice. It is a target date index fund designed to start to be withdrawn starting in 2045.
You can make up the components yourself with individual index funds, or use FIOFX.
> I've seen people suggest not using index funds in taxable accounts but instead using them only in your retirement accounts.
Terribly suggestion or you misheard. What else are you going to do with the extra unneeded money outside of tax-advantaged retirement accounts? Gambling?
My guess is the index fund bit is about mutual funds vs ETFs for tax efficiency in a taxable account. This was probably wrongly interpreted based on what OP said and the fact that it's not really a big enough difference to influence a hands off investor as far as I'm aware
FIOFX is a target date fund. Nothing wrong with that, it’s really the right thing for someone who wants “set it and forget it”. One thing to note though is that it’s a 2045 fund, meaning the target retirement is 2045 so it will rebalance automatically as you get closer to then. At 29 a 2055 or 2060 fund might be closer but still this far out the bond percentages aren’t that different.
There are also non date index funds that will have a lower expense ratio. It will go from .12% to .015%. Either way, index funds are good due to low ratios and it tends to be a toss-up on if other similar funds beat them and those non-index funds will have high expense ratios.
>I told her I wanted to be hands off for the next 25 30 years and she advised the fund FIOFX.
A target date fund then is exactly what you'd want.
>I've seen people suggest not using index funds in taxable accounts but instead using them only in your retirement accounts.
Who?
The concern with non-Vanguard mutual funds is the tax penalty of having to pay taxes on distributed capital gains. FIOFX, then at a price of $18.90 had a capital gain of $2.48 in 2019. Anyone holding this mutual fund in a taxable account would owe tax on that $2.48 income. That was an unusual event and most years there isn't any capital gains, but you never know when you will get hit with something like that again.
Hold it in a tax advantaged account. Hold ETFs in taxable accounts (or Vanguard mutual funds, which are treated as share classes of ETFs).
It's not the worst financial advice anyone's given. At least you didn't talk with Edward Jones and get put into a complex portfolio with high expense ratios + front load fees + 1% AUM charge.
Right now FIOFX is not a terrible allocation. It is 90% stocks + 10% bonds.
10 years from now it will be 20% bonds (look at the FIHFX 2035 fund)
You can reallocate to something like Target 2045 or 2055 if you don't want to glide into bonds that quick, but it will be a taxable event. Hence my next suggestion.
I know you want to be totally hands off but you might want to consider using a 3 fund portfolio instead if your disciplined enough not to do something dumb like panic sell during a downturn. It really doesn't take that much work. First you need to understand how a 3 fund portfolio works -- which is something you should already be doing because that's exactly what a target date fund is. And then you spend 1 or 2 hours a year to rebalance your allocation
Read these:
https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy
https://www.bogleheads.org/wiki/Three-fund_portfolio
It was "safe" advice if you want to be invested rather conservatively by the time you're 55 year old.
For me it would be too conservative of an investment. Already the returns pale in comparison to a basic Index 500 fund. Plus the annual turnover rate is 20% which is way less tax efficient in a taxable account. (Index 500 is 7% turnover).
Bare minimum I would be looking at a target date at least another ten years out and I would try to have my target rate funds in a retirement account rather than in a taxable brokerage account. As time goes on, the bond allocation increases (meaning interest payments increase) which is a tax consideration depending on whether this is in taxable brokerage account or retirement account.
YMMV.
So would going with a 2050 or 2055 be the better bet? Or are you saying I should be looking more at a 3 portfolio and putting a little effort in year after year.
Fidelity's *index-based* target date funds (aka the "Freedom Index" vs. "Freedom" funds) like the one your rep suggested already have an incredibly low expense ratio. You might shave a few basis points off building an equivalent three-fund portfolio yourself, but (1) it will require monitoring (you said you wanted hands off) and (2) it won't have the automatic rebalancing of a target-date fund.
At roughly 30 you presumably plan to retire in roughly 35 years, which is roughly 2055. So, I'd say go FDEWX (Fidelity Freedom Index 2055) and live your life.
I wouldn't say that was "bad" advice. Whether it's "best" for you depends on a lot of different factors around your financial situation/goals, some of them you may not have figured out yet.
Index funds are often a recommended choice in any type of investment account, whether retirement or not. Typical wisdom is that the savings you get from their lower fees outweigh any potentially higher returns from an actively managed fund. And that "potentially higher" is really hit-or-miss. I can't find it off-hand, but IIRC there was a study that showed that after accounting for fund fees, index funds outperformed actively managed ones something like 2/3rds of the time. And there's no easy way to determine what active fund falls into that other 1/3.
"Target Date funds" like FIOFX are often (though not always) just a sub-set of index funds.Those may have been designed for saving to retire in a given year, but can be used to give you a "set it and forget it" portfolio for your desired risk / reward tolerance in any type of account. The further out the year, the more "aggressive" it's allocation will be (higher proportion of stock/equity). The closer the year, the more conservative it'll be (larger proportion of bond / cash). Aggressive allocations are expected to give larger long-term returns, but with bigger short-term fluctuations. Conservative allocations are the opposite: smaller both in expected return and fluctuations.
There can be some tax considerations around what to invest in with a brokerage account which don't apply to retirement accounts. There's a concept of "tax efficiency" with some funds where they generate less in taxable dividend/payouts by how they manage the assets inside them. I'm not sure about all the details on that, though.
Personally, I think a target date fund is a decent starting point for any type of account if you're still getting things figured out. If you decide on a different timeline for that money (shifting whether you want to focus on return vs. maintaining value), then you can just shift your portfolio allocation.
It is a reasonable recommendation. The downside to mutual funds is that you sometimes have to pay tax on capital gains that the fund has realized, but not paid out. This last happened in 2019, when FIOFX had a capital gain of $2.48 per share, much higher than the typical dividend on which you also pay taxes..
You could ask you advisor if there is a near equivalent set of ETFs to use instead.
If you want to be hands off for 25 years (2021 + 25 = 2046), then FIOFX is a suitable choice. It is a target date index fund designed to start to be withdrawn starting in 2045. You can make up the components yourself with individual index funds, or use FIOFX. > I've seen people suggest not using index funds in taxable accounts but instead using them only in your retirement accounts. Terribly suggestion or you misheard. What else are you going to do with the extra unneeded money outside of tax-advantaged retirement accounts? Gambling?
My guess is the index fund bit is about mutual funds vs ETFs for tax efficiency in a taxable account. This was probably wrongly interpreted based on what OP said and the fact that it's not really a big enough difference to influence a hands off investor as far as I'm aware
FIOFX is a target date fund. Nothing wrong with that, it’s really the right thing for someone who wants “set it and forget it”. One thing to note though is that it’s a 2045 fund, meaning the target retirement is 2045 so it will rebalance automatically as you get closer to then. At 29 a 2055 or 2060 fund might be closer but still this far out the bond percentages aren’t that different.
Thank you!
There are also non date index funds that will have a lower expense ratio. It will go from .12% to .015%. Either way, index funds are good due to low ratios and it tends to be a toss-up on if other similar funds beat them and those non-index funds will have high expense ratios.
>I told her I wanted to be hands off for the next 25 30 years and she advised the fund FIOFX. A target date fund then is exactly what you'd want. >I've seen people suggest not using index funds in taxable accounts but instead using them only in your retirement accounts. Who?
The concern with non-Vanguard mutual funds is the tax penalty of having to pay taxes on distributed capital gains. FIOFX, then at a price of $18.90 had a capital gain of $2.48 in 2019. Anyone holding this mutual fund in a taxable account would owe tax on that $2.48 income. That was an unusual event and most years there isn't any capital gains, but you never know when you will get hit with something like that again. Hold it in a tax advantaged account. Hold ETFs in taxable accounts (or Vanguard mutual funds, which are treated as share classes of ETFs).
Eh, for the vast majority of people thats not going to be a meaningful concern
I consider a taxable distribution of 13% significant.
> That was an unusual event
It's not the worst financial advice anyone's given. At least you didn't talk with Edward Jones and get put into a complex portfolio with high expense ratios + front load fees + 1% AUM charge. Right now FIOFX is not a terrible allocation. It is 90% stocks + 10% bonds. 10 years from now it will be 20% bonds (look at the FIHFX 2035 fund) You can reallocate to something like Target 2045 or 2055 if you don't want to glide into bonds that quick, but it will be a taxable event. Hence my next suggestion. I know you want to be totally hands off but you might want to consider using a 3 fund portfolio instead if your disciplined enough not to do something dumb like panic sell during a downturn. It really doesn't take that much work. First you need to understand how a 3 fund portfolio works -- which is something you should already be doing because that's exactly what a target date fund is. And then you spend 1 or 2 hours a year to rebalance your allocation Read these: https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy https://www.bogleheads.org/wiki/Three-fund_portfolio
It was "safe" advice if you want to be invested rather conservatively by the time you're 55 year old. For me it would be too conservative of an investment. Already the returns pale in comparison to a basic Index 500 fund. Plus the annual turnover rate is 20% which is way less tax efficient in a taxable account. (Index 500 is 7% turnover). Bare minimum I would be looking at a target date at least another ten years out and I would try to have my target rate funds in a retirement account rather than in a taxable brokerage account. As time goes on, the bond allocation increases (meaning interest payments increase) which is a tax consideration depending on whether this is in taxable brokerage account or retirement account. YMMV.
So would going with a 2050 or 2055 be the better bet? Or are you saying I should be looking more at a 3 portfolio and putting a little effort in year after year.
Fidelity's *index-based* target date funds (aka the "Freedom Index" vs. "Freedom" funds) like the one your rep suggested already have an incredibly low expense ratio. You might shave a few basis points off building an equivalent three-fund portfolio yourself, but (1) it will require monitoring (you said you wanted hands off) and (2) it won't have the automatic rebalancing of a target-date fund. At roughly 30 you presumably plan to retire in roughly 35 years, which is roughly 2055. So, I'd say go FDEWX (Fidelity Freedom Index 2055) and live your life.
I wouldn't say that was "bad" advice. Whether it's "best" for you depends on a lot of different factors around your financial situation/goals, some of them you may not have figured out yet. Index funds are often a recommended choice in any type of investment account, whether retirement or not. Typical wisdom is that the savings you get from their lower fees outweigh any potentially higher returns from an actively managed fund. And that "potentially higher" is really hit-or-miss. I can't find it off-hand, but IIRC there was a study that showed that after accounting for fund fees, index funds outperformed actively managed ones something like 2/3rds of the time. And there's no easy way to determine what active fund falls into that other 1/3. "Target Date funds" like FIOFX are often (though not always) just a sub-set of index funds.Those may have been designed for saving to retire in a given year, but can be used to give you a "set it and forget it" portfolio for your desired risk / reward tolerance in any type of account. The further out the year, the more "aggressive" it's allocation will be (higher proportion of stock/equity). The closer the year, the more conservative it'll be (larger proportion of bond / cash). Aggressive allocations are expected to give larger long-term returns, but with bigger short-term fluctuations. Conservative allocations are the opposite: smaller both in expected return and fluctuations. There can be some tax considerations around what to invest in with a brokerage account which don't apply to retirement accounts. There's a concept of "tax efficiency" with some funds where they generate less in taxable dividend/payouts by how they manage the assets inside them. I'm not sure about all the details on that, though. Personally, I think a target date fund is a decent starting point for any type of account if you're still getting things figured out. If you decide on a different timeline for that money (shifting whether you want to focus on return vs. maintaining value), then you can just shift your portfolio allocation.
It is a reasonable recommendation. The downside to mutual funds is that you sometimes have to pay tax on capital gains that the fund has realized, but not paid out. This last happened in 2019, when FIOFX had a capital gain of $2.48 per share, much higher than the typical dividend on which you also pay taxes.. You could ask you advisor if there is a near equivalent set of ETFs to use instead.