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Your personal finance questions answered

July 23, 2014

Three Vanguard Certified Financial Planner™ professionals recently spent their lunch hour answering personal finance questions on Vanguard's Facebook page.

Here are a few edited highlights from Jane Simpson, Julie Edwards, and Kahlilah Dowe's conversation.

If you expect to need retirement money in about 3 years, why should you have any money in bond funds and at what duration?

Jane Simpson: It sounds like you're gearing up to retire soon—that's great news! I generally recommend that my clients have an appropriate ratio of all three major asset classes (stocks, bonds, and cash) in their portfolio at any given time. While some cash holdings may be necessary for immediate spending needs, the bulk of your portfolio should generally be divided between stocks and bonds. Bonds can mitigate some of the risks associated with stocks, providing income and stability during periods of market volatility. That being said, over the long term, stocks provide the best protection against inflation, so it's important to own both. You should periodically review and adjust your asset allocation to match your risk tolerance, time horizon, and goals. Here's a good article that discusses why investors should own various asset classes. Good luck!

If my company doesn't match at all, is it better to do a Roth on my own or still participate in my company's retirement plan?

Julie Edwards: Even without the employer match, a company retirement plan still offers a tax benefit now and tax-deferred growth. If you expect to be in a lower tax bracket in retirement, then the current tax break could be a better option. But if you expect to be in a higher tax bracket down the road in retirement, a Roth IRA can be a great option because there's no income tax on qualified withdrawals and no required minimum distribution. Because there's uncertainty about future tax rates, you may want to consider contributing to both types of accounts as a way to provide "tax diversification." Having both gives you flexibility when deciding where to withdraw money from your portfolio.

Where's the best place to put away 20 grand over the next 15 years? I will need it in 15 years.

Jane Simpson: Thanks for your question! You have a fairly long time horizon, so you can probably afford to take some amount of risk with your assets. To determine the "best place" to invest over the next 15 years, you'll have to figure out your risk tolerance, time horizon, and goals. Basically, the more risk you're willing to take with your money, the more aggressively you can invest it. We have some great tools on our website that can help you narrow down your choices. I'd start with this page. If you'd like to discuss your options, give us a call—we're here to help!

If I plan on retiring in the next 5–6 years, should I be at 80% stocks and 20% bonds?

Kahlilah Dowe: If you're retiring in 5–6 years and you plan to start spending from your portfolio at that time, allocating 80% to stocks may be too aggressive. For example, if the stock market goes down significantly when you need to take a withdrawal from your portfolio, you may be forced to sell more shares to get the income you need, which could decrease your potential for future growth. A more conservative mix of stocks and bonds, which will expose you to less risk, could help you focus on maintaining what you've already accumulated. This questionnaire can help you figure out an appropriate asset mix.

What's the best way to start saving when you're in your 30s? Mutual fund, Equity-Indexed Annuity (EIA), IRA?

Jane Simpson: If you're employed, I'd recommend that you start contributing to your employer-sponsored retirement plan. While the goal for any investor is to save as much as possible for retirement (Vanguard recommends saving at least 12%–15% of your compensation), if that's not possible, start by simply saving enough to get your employer's full match (if one is offered). Once you've maxed out your employer plan contributions, consider investing in a Roth IRA for tax diversification. To see if you're eligible to contribute to a Roth, check out this page. Once you've met your retirement savings goals, you could consider nonretirement accounts. Any of these account types—employer plans, IRAs, and taxable accounts—could potentially hold mutual funds. The earlier you start saving, the easier it will be to meet your long-term goals!

What's the best "estimator" for amount of funds needed in retirement for someone without a pension? I've heard $1.5 million or 8 times your current salary.

Julie Edwards: It's helpful to have an idea of what your expenses will be in retirement. Then consider what you'll receive from Social Security and any other income sources. We generally recommend saving as much as you can . . . at least 12%–15% of your salary while working. Once in retirement, a useful starting point is a withdrawal strategy of taking 4% or less from your portfolio each year (adjusted annually for inflation). For example, a $1.5 million portfolio could generate $60,000 in annual income (before taxes).

Why is there a 60-day wait when moving assets from fund to fund? Makes no sense to me. Why not a flat fee for extra transactions?

Jane Simpson: Our frequent-trading policy is designed to protect our long-term investors who aren't frequently moving money between funds—it helps to keep our costs low and prevents market-timing. If you need to make a trade into an account that's subject to the policy, you can send us a written transaction request.

A company I used to work for is offering an early distribution on a pension plan. I was thinking of rolling it over to Vanguard. I was wondering if I can change funds as economic times change?

Julie Edwards: First of all, as long as your pension plan allows for rollovers, you can roll it over into an IRA. Once the IRA is established, you can decide which securities you'd like to own. As you make this decision and other investment decisions going forward, consider your time horizon, goals, and risk tolerance as opposed to focusing on economic or short-term market movements. Good luck—let us know if we can help!

I max out my Roth IRA every year, but my employer doesn't offer a 401(k) plan. What else can I do besides contribute to my Roth to save for retirement? Should I look into ETFs in a brokerage account?

Jane Simpson: Good job maxing out your Roth IRA! Consider saving in an after-tax account—you could consider investing in mutual funds, including ETFs and/or individual stocks and bonds. While you'll pay some tax on an annual basis (on the dividends and capital gains that the funds generate), generally, you'll only pay tax on your gains when you sell the security—at a lower long-term capital gains tax rate. Adding an after-tax account to your portfolio will help to diversify your retirement savings.


  • All investing is subject to risk, including the possible loss of the money you invest.
  • Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.
  • Withdrawals from a Roth IRA are tax free if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both.
  • Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
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