5min chapter

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MtoM #192: Hospitalist Pays Off $380,000 of Student Loans and Finance 101: Target Date Funds

White Coat Investor Podcast

CHAPTER

Understanding Target Date Funds: Costs, Benefits, and Strategies

This chapter explores the nuances of target date funds, focusing on the vital role of low expense ratios in investment success. It offers practical tips for choosing cost-effective options while discussing their advantages in tax-protected accounts and implications for estate planning.

00:00
Speaker 1
It is expressed as a percentage of your total dollar amount in that investment. If the expense ratio is 1%, you must pay 1% of your total holdings to the investment company each year. So expense ratios are important to pay attention to. They erode your wealth and you want to keep them low. Some target date funds, like the ones at Vanguard, have very low expense ratios. The 2050 fund I use has an annual fee of 0.08%. That is awesome. If I have $100,000 in the fund, I pay $80 a year for those three benefits we talked about earlier. That is a dang good deal for a fund that guarantees a good asset allocation, follows a glide path, and automatically rebalances. Some target date funds have terrible expense ratios, like 0.75%, up to 2%. At 1.5%, if you have $100,000 in the fund, you have to pay $1,500 a year for those benefits, have a million dollars in the fund. And you're paying $15,000 every year. That is not a good deal. Don't do that. Find lower cost individual funds and manage the account yourself or find a non-gross financial planner to help you. I do this all the time with clients. I get them to stop using really awful target date funds and just teach them how to adjust the asset allocation themselves so they don't waste thousands of dollars in these crappy funds every year. The big brokerages like Vanguard, Fidelity, and Schwab have great low-cost target date funds. But you do have to watch out for Fidelity a little bit. They offer three target date funds for each target year. One of them is super cheap and awesome. One of them is a little worse, and one of them is pretty bad. You have to make sure you are buying the index fund investor class shares to get the low-cost version at Fidelity. Another thing I like about target date funds is the ease they bring to estate planning. I could follow my own glide path and rebalance my own accounts. I'm a finance nerd. I love this stuff. My wife, she is not a finance nerd and she barely tolerates this type of conversation. She decidedly does not want to create and follow a glide path with quarterly rebalancing. So even though this is my professional field, I use target date funds in almost all of our accounts because if I die, no one needs to do anything. Nothing needs to be changed. The investments will just roll forward on a good track into the future forever. My closing thought after all that hype about target date funds is don't use them in your taxable brokerage accounts. For myriad technical reasons that transcend this 101 lesson, just know that they are not typically a smart choice in your taxable brokerage account. Target date funds are awesome in tax-protected accounts like 401ks, 403bs, 457, HSA, and your IRAs. Also in 529s as so-called target enrollment funds, with the target year being the year the child finishes high school or starts college. Just don't use them in your taxable account. They have become nearly ubiquitous in employer retirement accounts these days, which is good, except for the ones that are awful. So watch out for those. They are almost always available in your HSAs and they are definitely available in your IRAs as long as you're with Vanguard, Fidelity, Schwab, etc. If you have some horrendous IRA with Wells Fargo or Edward Jones, you probably don't have access to good target date funds. But in that case, you have bigger problems anyway. Target date funds are pretty cool. You guys give them a long look. If you are into maximum simplicity and low stress, they are the ultimate in set it and forget it investing. Thanks so much for listening and have a fantastic rest of your day.
Speaker 3
Well, Inns Capital hears from many white co-professionals who spend most of their free time, lunch breaks, evenings, weekends, even vacations, chasing elusive deals or doing their own labor on real estate properties. They're often disappointed with the returns they get for the time and money they invest. Other passive investors have been burned because they didn't do the due diligence necessary before writing a check. It's hard to know who to trust and you could get burned. Berlin's Capital is your professional due diligence partner helping you invest in private real estate with projected mid-double returns. They take an extreme approach to vetting each operator, visiting their offices and properties in person, doing in-depth background checks, analyzing their debt structure, and much more. To learn more, go to whitecoatinvestor.com backslash Wellings. That's W-E And we'll see you next week on the Mouthless and Warner podcast. The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.

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