Vanguard Target Retirement Funds vs. DIY Admiral shares

Vanguard Target Retirement Funds vs. DIY Admiral shares

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If you’re a beginner or a passive investor, you want a diversified portfolio so you can passively invest and not have to worry about it. If you’re not keeping your eye out on the market, you probably want to be a passive investor. If you’re in a low tax bracket, it might not be worth it for you to do tax loss harvesting manually. If you’re putting your money in Vanguard, you’d have to do your tax loss harvesting manually, vs having a robo-advisor do it for you.

There are two kinds of Vanguard funds, Admiral shares and Investor shares. Admiral shares are cheaper but require a $10,000 minimum for funds that try to match an benchmark (SP 500, money market funds, TIPs funds, etc). For actively managed funds where the portfolio manger picks out shares of stocks or bonds to invest in, Vanguard requires a minimum of $50,000, and $100,000 for sector specific funds (tech, healthcare, etc).

Admiral shares are around 40 percent lower than their Investor shares. The funds are exactly the same, with Admiral shares having lower expense fees. Think of Admiral shares like Costco, where you buy things at wholesale prices. Same exact item, just in bulk.

The reason why I’m explaining this is because Vanguard has target retirement funds, which allow you to pick the date you’re retiring and invest that way. Let’s say you’re planning on retiring in 2035, so you’d pick the Retirement 2035 fund. However, Vanguard only allows for Investor shares in the retirement funds, even if you have $10,000 invested — this is due to regulatory/fund structure reasons.

You could build the exact same retirement fund out of Admiral shares if you had the minimums for each portion of your fund. Below is a table showing the minimum fund amounts for each year of the target retirement account Vanguard offers, if you want to build your own retirement fund out of Admiral shares. Most Vanguard funds include 2 bond funds of international and domestic bonds and 2 equity classes, also domestic and international. I’ve included minimums if you buy into both the international and domestic bond funds, and also if if you just buy into the domestic bond fund with the total overall percentage of bond funds.

If you’re looking to match Vanguard’s allocation exactly the minimum amount you’d need to invest is close to $100,000. The Vanguard domestic and international bond funds have a correlation of .89, which is pretty decent, so if you’re looking to reduce your minimum investment to get Admiral shares and save expenses, I’d consider grouping the bond funds together and just investing in domestic bonds. There’s a cool little tool on this website that allows you to see the correlation between two Vanguard funds. This lowers the minimum you need to invest. If you’re retiring in a decade or less, you’d just have to invest $30,000 and below.

For simplicity, I recommend rebalancing twice a year to make sure your percentages match Vanguard’s if you want to go the manual route of a DIY Admiral share fund.

Even if you have the minimum required to make your own retirement fund out of Admiral shares, it might not be worth your time to do so. Below is how much Vanguard will charge per retirement year fund per $100,000 in investments if it were in Admiral funds, or if you just bought the retirement fund in Investor shares. The expense fees range from .14 percent to .16 percent for the Target Retirement Fund in Investor shares, which translates to $140 to $160 per $100,000. The fees range from .06 to .07 percent for DIY Admiral shares, which translates to $60 to $70 per $100,000 per year. If you have Admiral shares, the expense fees are roughly 60 percent cheaper, which is a significant percentage of savings, but considering the absolute value of savings, it might not be worth it to some people.

If you have $100,000 in investments, it will save you close to $65 per $100,000 per year in fees. Is this worth it to you to rebalance twice a year? I’m going to say no, no matter how much it costs because I don’t want to be buying and selling things for a few minutes — Vanguard can do it automatically without slippage. It’s better to have a program rebalancing all portions of your retirement fund concurrently than doing it yourself over the course of a few minutes.

Do you put your money in a DIY or the normal Retirement fund for Vanguard? Do you use another provider to balance your portfolio?

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6 thoughts on “Vanguard Target Retirement Funds vs. DIY Admiral shares

  1. I have most of my money in Admiral funds and some in ETFs. I invested in ETFs when I started out and had no idea about Vanguard. As I learned more, and had the guts to invest serious money, I moved to admiral funds – VTSAX and VFIAX. The main reason being, I couldn’t automatically invest in ETFs.
    I don’t invest in bonds or foreign funds, etc. Just those two. And I would have only one, but I can’t decide which one I want to settle on. So I am keeping my money half and half. I started with investor funds, and changed it to admiral funds once I crossed the threshold of 10,000 dollars.
    Honestly, I don’t do actual rebalancing – selling what I have more of and buying what I have less. However since I am continuously investing in it, I rebalance by investing more in what is lagging behind.

    1. VTSAX and VFIAX have a correlation of .99 so they’re basically the same thing (statistically, anyway). It’s because the largest market cap stocks (Apple, FB, Google, etc) make up such a large proportion of the total value. So, either would be good, I feel :).

      I would recommend investing part of your portfolio into bonds depending on your age/retirement year because it has a lower failure rate for when you start withdrawing. Also, if you’re retiring in 10 or 20 years, you don’t want all your investments in stocks — what if the market dips or crashes? You want part of it in bonds because when the market crashes, the Fed steps in to lower interest rates, and the return on your bond portfolio hedges out part of the market crash.

      This study does a great job of explaining it:

      The author has updated his numbers since then as the original was published in 1999.
      The 50/50 allocation towards stocks and bonds is the safest (possibly due to 20 percent interest rates in the 1980s, but who knows, I haven’t run the numbers there, just a hunch).

      A blogger, Early Retirement Now, does a great study on the SWR and updated data. His methodology also comprises of Monte Carlo simulations with historical data.

      It’s an interesting topic for sure on what allocation one should do if they’re looking to FIRE. This comment could be so much longer, maybe I’ll write a blog post on allocations for fun :).

      1. Thanks a lot! I am looking forward to the blog post. And, I will look at those links.

        We have a portion of our savings as CDs. We think of that as our “bonds” 🙂

        Right now, both of us are earning enough. We can just continue working longer if things are not going well. I know it is a huge risk, but we want it to grow as fast as it can while we can afford to take the risk.

        Once we are really close to retirement, we might move money to bonds – again, I have to think about it. If we continue to generate some money in retirement, I might just keep something like 2 years worth of expenses (80,000 dollars) in CDs and have the rest in index funds. That way, we could go through a recession without having to touch the index fund investing.

        1. So many blog posts I want to write, so little time. My schedule keeps adding more blog posts in the middle haha. I’m glad though, it’ll be hard to run out of ideas :)!

          Gotcha! Are the savings rates you have higher than I bonds or the Ally 1.75% savings account?

          I think that’s a good way to think of it. Plus you guys can be barista FI when you’re close and do software consulting for a few hours a month from home :). Which is almost like being retired because you can sit on your code, and watch that 5 hours of TV you’ve been wanting to do :).

          Hm, that is an interesting optimization. Since you’re only allowed $3k/yr for taxable losses (plus carryover) if the market dumps 50 percent and you sell, it might be a good time to harvest losses? It’s hard to harvest in a bull market since the market doesn’t go below what you bought it at. I think that’s why some people keep it to 6 months of expenses, but tbh I haven’t done the math so I can’t be too sure. Would be a very interesting blog post. You have so many cool ideas :)!

  2. I recently put most of my money into the total stock market index admiral class (VTSAX) and have a smaller amount in the total bond market investor class (VBMFX). I plan on moving the bonds into the admiral version (VBTLX) once it exceeds $10k.

    1. Sounds like a plan! Very cool crypto post. Have you looked at transaction times/fees of different crypto? With the throughput of Bitcoin at 7 transactions per second, I can’t think the technology would ever be usable vs other alt coins. Current CC processing is around 16,000 transactions per second. I don’t think there’s a crypto that comes close to it.

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