Cut­ting in­vest­ing ex­penses has limit

Austin American-Statesman - - BUSINESS -

My hus­band re­tired last year at age 63. 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, and the ad­viser moved the money to the Van­guard Tar­get Re­tire­ment Fund (VTENX). Your last col­umn men­tioned funds with ex­pense ra­tios well be­low the 0.17 per­cent this fund car­ries, and I ques­tion whether the VTENX is too ex­pen­sive. I am at a loss to know if his money is in the best fund.

I am 58 and sev­eral years from re­tire­ment. We are not draw­ing from his 401(k). We owe $135,000 on our home, fi­nanced with a 15-year mort­gage at 4.5 per­cent. We also owe $30,000 on an RV, fi­nanced for 15 years at 6 per­cent. Is there a bet­ter, cheaper Van­guard fund or op­tion to us? — V.A., Salem, Ore.

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.

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. 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 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 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 a higher yield. Since you are 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.

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? — J.C., by email

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 more con­ser­va­tive with your tax-de­ferred ac­counts than with your tax­able ac­counts. Scott Burns is a na­tion­ally syn­di­cated colum­nist who has been writ­ing about per­sonal fi­nance since 1977. Send ques­tions to busi­ness@states­man.com.

Scott Burns Per­sonal Fi­nance

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