Q: My husband retired last year at age 63 after hip replacement surgery barred him from continuing to drive a log truck. His employer has offered a Vanguard funds 401(k) plan only for the past 15 years, so he has less than $285,000. Vanguard called him to determine what to do with his account in retirement. After a brief conversation, the adviser moved the money to the Vanguard Target Retirement Fund (VTENX). You mentioned funds with expense ratios well below the 0.17 percent this fund carries, and I question whether the VTENX is too expensive. I know retirement investing is different from saving for retirement, but I am at a loss to know if his money is in the best fund. I am 58 and several years from retirement. I work full time for the state of Oregon, Tier II, so I will not have the candy-coated retirement Tier I folks have. So far, we are not drawing from his 401(k). Instead, we are relying on his Social Security and my earnings. We owe $135,000 on our home. It is financed with a 15-year mortgage at 4.5 percent. We also owe $30,000 on an RV, which is financed for 15 years at 6 percent. Is there a better, cheaper Vanguard fund or option to us?
A: There is a point where trying to cut investment management expenses doesn’t do much for you, and you’re there. You gain a great deal, for instance, by moving away from investments that cost 2 percent a year to a low-cost index fund source such as Vanguard because the cost difference may be every dime of dividend and interest income the fund produces, and it can go to you rather than a fund company and its sales force.
Look at it this way: If most people have plans that cost 1.5 percent, you’ve eliminated 89 percent of all cost burden already with your 0.17 percent cost fund.
So when you get down below expenses of about 0.25 percent, the more important question is how one fund may benefit you more than another. It is possible, for instance, to both reduce expenses and find a fund that will better suit your needs. One of the reasons Vanguard Retirement Income 2010 (VTENX) costs 0.17 percent is that it is not offered in Admiral shares. Admiral shares give you a cost break for making a larger investment, and your husband’s $285,000 account balance certainly qualifies.
You might consider the Vanguard Balanced Index fund Admiral shares (ticker VBIAX). This fund has an expense ratio of 0.1 percent, a recent yield of 1.83 percent and a traditional 60/40 mix of equities and fixed-income. VTENX has less in equities (about 50 percent) but has some international equities and has a higher yield. Since you are both relatively young and not expecting to make major withdrawals in the near future, a somewhat higher holding of equities would likely better suit your needs.
You’ll get a lot more benefit for your cost-saving effort if you look for refinancing opportunities on your house or RV.
Q: Are you allowed to show stock losses in your IRA on your 1040 income tax form? I know you can defer gains, but what about losses?
A: Money that goes into an IRA account is income that has not been taxed. It is taxed only when it is taken out of the account. As a result, losses or gains while the money is in the account are irrelevant.
This is one of the reasons you should be a bit more conservative with your tax-deferred accounts than with your taxable accounts. If you make an investment in a taxable investment account, you can balance realized losses against realized gains. That’s why year-end selling is often called “loss harvesting,” as people sell losing stocks to offset realized gains on their winning stocks. If your losses exceed your gains, you can take a maximum loss of $3,000 against other income on a joint return, $1,500 on a single return. If your loss exceeds that annual net limit, you can carry the excess forward.
Questions about personal finance and investments may be sent by email to scott@scottburns.com.
