Best SEP IRA strategy for my family?

January 5, 2015 8:59 AM

I am looking for quick, non-professional advice or ideas about my annual SEP IRA contribution. Details below, but the upshot is that I'm already committed to the vehicle (SEP IRA), the vendor (Vanguard) and the amount (max).

I am 35, married, with a baby on the way this month and a 2-year old at home. My spouse works full-time (but will be on leave for much of 2015) and contributes liberally to a 403b.

I run a small consulting firm and our business is seasonal based on 2-year cycles. This was an on-year and we did well. I would like to contribute the maximum to my Vanguard SEP IRA (which I only started last year after a decade+ of ignoring retirement savings/not making much $).

I currently have last year's contribution (about $33k) invested in a 2040 target fund. My inclination is to just put every dollar of this year's contribution into that same fund. Is that the right idea? Are there other ideas to consider? Should I be eyeing buying Admirals shares in a couple years?

posted by Ignatius J. Reilly to Work & Money (6 answers total)

Wow, great comment by MoonOrb. I was going to post many of the same things, but probably not as eloquently.

I will say that one of the main complaints against target date funds in general is the cost (discussed in point 1 above). For other providers, this is often a serious issue because they will charge 1% or more for a target date fund - I have to say, the complaint basically rings hollow with respect to Vanguard. While it may be true conceptually that you can pay "significantly" lower fees for the underlying funds, such as 0.10 or 0.05 as opposed to 0.16-.18 (assuming you have access to the Admiral shares - again see above), that is not a lot on an absolute basis and you should not let it stand in your way to obtain this convenience.

One issue with MoonOrb's point 2 - the 2040 target date fund is 90% in stocks right now, not bonds, as shown in that link. Which is as it should be.

The other major concern about target date funds, and I think this one does apply to Vanguard as well, is that their strict date-based rules about asset reallocation can interact poorly with overall market trends. For example, look at how the 2010 and 2015 funds have performed in the last few years - they were essentially selling into a stock market crash, including a bunch of selling at the bottom. Compare that to, for example, the performance of a standard 60/40 balanced fund (such as VBINX, the one Vanguard sells) - that is also a conservative asset allocation, not entirely inappropriate for someone nearing retirement, though of course you could argue it is too heavy on stocks, and it has well outperformed lately by not dumping stocks in 2008 and 2009.

Basically, if you have the wherewithal to stay in the market a few more years, whether by putting off retirement or whatever else, you may be able to make better choices than the target-date fund would. Bogleheads may dismiss this as "market timing," but frankly a target date fund is already committed to a certain type of market timing. Anyway, something to consider.
posted by Joey Buttafoucault at 9:48 AM on January 5, 2015

One rule of thumb is that you should be invested in bonds equal to your age as a percentage. So in your case, that is 35% bonds. You could do that at Vanguard with their bond fund, and then the balance of 65% in the Total market stock fund. That is conservative by modern portfolio theory standards, but it's all personal. Is saving $2 mill vs. $1.7 mill with a more conservative approach going to make a huge difference in your retirement in 2040? Probably not. Will the ups and downs of a more volatile portfolio add stress you don't need to your life now? Only you can answer that question. If you want an invest and forget about it portfolio the Vanguard targeted retirement date funds are fine for most people.
posted by COD at 10:27 AM on January 5, 2015

This is really great information. Thanks to all of you.

Assuming that I can continue to make the ~$50k contribution every other year (and something smaller in the off years), would it be wise to simply pick whether I want to take the TRF route or not OR to actually buy into multiple funds (like having some % in a TRF and some in a fund with more bonds in the mix)?
posted by Ignatius J. Reilly at 10:30 AM on January 5, 2015

For someone who doesn't want to tinker with their funds, and most people who tinker end up losing money, the Vanguard Target Retirement Funds are a fabulous way to go. Just put all of your SEP money in one Target fund and forget about it. You have more important things to spend your time on running your business.

Make sure that you have the tolerance to ignore temporary market ups and downs and that you have the discipline to ignore them. As pointed out, the 2040 fund currently has about 90% stocks so it could have significant temporary declines if we get another year like 2008, which will inevitably happen.

If you don't think you can tolerate that kind of risk, choose one of the earlier date funds with more bonds. But the 2040 fund is currently right at the transition where it is starting to slowly shift to more bonds for retirement so it might be fine for you.

Don't worry about expenses. The Vanguard annual fee is only $90 per $50,000. It's not worth the hassle of juggling several funds yourself just to save a few bucks a year.

Years from now, when you have more time on your hands, you can get into more directly managing your investments yourself, if you like that sort of thing. But keep in mind that tinkering generally causes more harm than good.
posted by JackFlash at 10:52 AM on January 5, 2015

I'm not you, and I'm not an investment advisor. But if I were you I'd stick it in the Target 2040 fund and forget about it. Don't overthink this. You're doing by far the most important thing, which is to fund the IRA with a low-cost, respected investment company.

BTW don't feel this investment is a permanent decision; you can always reallocate your funds at Vanguard later. Also if you want some more advice Vanguard should be willing to answer this question for free for you on the phone.
posted by Nelson at 1:44 PM on January 5, 2015

> I'd stick it in the Target 2040 fund and forget about it. Don't overthink this. You're doing by far the most important thing, which is to fund the IRA with a low-cost, respected investment company.

Exactly this. You have other things to do, and you're doing the most important part correctly. The urge to tinker is irresistible, and usually ends up losing money.
posted by RedOrGreen at 11:26 AM on January 6, 2015