Retirement planning: Our experts answer your questions
April 29, 2014
From time to time everyone needs a hand with their retirement plan, even if it's just a little validation from an expert that you're on the right track.
Two Vanguard retirement experts, Maria Bruno and Colleen Jaconetti, recently hosted a Q&A session on our Facebook page. Here's an edited recap of the event.
How much do I need to save to be able to retire?
Maria Bruno: It depends on a number of variables. We generally suggest saving 12%–15% of your pre-tax income for retirement (including any employer contributions). As a start, you could use our online tool to help you plan. Good luck!
I'm trying to diversify with your ETFs, but there are so many to choose from. Small-, mid-, large-cap—which are either growth, value, or none. Is there an easier way?
Colleen Jaconetti: Yes, there is an easier way. I suggest buying an ETF that offers broad market exposure to the areas you mention. Here's a tool that can give you a recommendation for an ETF based on what you're looking for: Get your ETF recommendation.
Can you recommend a good mutual fund for me to invest in? I'm 30 years from retirement, and I know it will go super fast. I'm trying to save more than just my 401(k).
Maria Bruno: Congratulations for getting a solid start on your investing plan to take advantage of the power of compounding. Given your long time horizon, consider a portfolio that has a balance of growth and income. A balanced fund or a target-date fund (which is subject to the risks of its underlying funds) may be a good option, and perhaps you can supplement your 401(k) with a Roth IRA for tax diversification. To get a personal mutual fund recommendation, I'd suggest you visit this page: Get your mutual fund recommendation.
Do you think an 80/20 equity/bond mix is too aggressive for a 50-year-old with 10 years to retirement?
Maria Bruno: Of course I'll start with "it depends"! The asset allocation decision will vary among investors, so what you'll want to focus on is your goal, time horizon, and risk tolerance for market risk. Keep in mind that most retirees will want a good portion of their portfolio in diversified stocks (as well as bonds)—and with increasing life expectancy, retirees should, in general, expect to draw down their portfolio for at least 30 years. Also, some retirees have some legacy goals that could warrant a more aggressive allocation. I'd suggest you take our investor questionnaire to help assess your asset allocation.
I'm retiring soon and will need some income from my investments. Do I need a dividend-focused fund to throw off enough income?
Colleen Jaconetti: Typically, we wouldn't recommend overweighting dividend-paying investments as part of a diversified portfolio. If you take this approach, you may expose yourself to more risk than you realize. We'd suggest implementing your asset allocation using broadly diversified investments, and if the income falls short of your spending needs, we'd suggest spending from the capital appreciation of the portfolio.
I know of three kinds of retirement accounts taxable, tax-deferred (like 401ks and traditional IRAs), and tax-free (like Roth IRAs). Do you have any general advice on how to balance these? I'm thinking it's a good idea to have all three to cover the risk that taxes may rise or fall dramatically.
Maria Bruno: Absolutely—having 3 types of accounts will allow you to benefit from tax diversification, allowing you to use tax-efficient strategies when you spend from your portfolio in the future. That said, if you have charitable intent, making a charity the beneficiary of a tax-deferred account can be smart, since the charity will not have to pay income taxes (thus getting the full monetary benefit of your legacy).
Do you think retirement investments should be solely a mix of stocks, bonds, and money market mutual funds? Are there any other investment products I should be thinking about?
Colleen Jaconetti: The short answer's no. Implementing your asset allocation using broad-based, low-cost stock, bond, and money market index funds should provide the diversification benefits to help meet your retirement income needs.
How can I determine if I have enough money to retire early? Also, how do I get health insurance since I'm not old enough to get Medicare. Is the Affordable Care Act the answer?
Colleen Jaconetti: Congrats on being in a position to retire early! The first thing you need to do is get a good handle on your anticipated income and expenses in retirement. If the amount you anticipate needing exceeds 3%–5% of your initial retirement portfolio balance, you may want to consider delaying retirement. Here's a calculator that may help you make your decision. As far as health insurance is concerned, the exchanges offered as part of the Affordable Care Act are certainly an option. In addition, you may want to investigate companies that offer individual insurance plans. Be sure to factor these costs into your retirement spending needs.
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