Design an American’s Retirement Account

by Mr. Cheap

I have a good friend who lives in the states who is looking to get serious about her retirement saving. She wants to put about $250 / month into a 403K (tax sheltered retirement savings at a non-profit, like a 401K or an RRSP). She’s read some investing books, but isn’t really interested in the subject and often finds them confusing.

She’s been looking for a vehicle she can set up, pay into every month and ignore (with as little monthly / annual maintenance as possible). She’ll be looking to start cashing it in when she retires in 3 decades or so.

Originally I was advocating buying “dividend aristocrats” that have a high yield, but obviously this takes research and more of an ongoing awareness (how are the businesses you own doing these days?). Also, there’s definitely a risk in having your retirement savings concentrated on a handful of companies (even if they’re great long-term companies).

Instead, I’ve recommended Vanguard’s Balanced Fund (60% equities in broad US market index, 40% bond funds – 0.2% MER, 9.34% average return over the last 5 year) as a way to put money away, not worry about it, and expect to have a nice nest egg to retire from. She would buy this on auto-pilot, and ignore it.

Given that the bulk of this blog’s readers are clearly smarter then I am, would you agree with this recommendation? Any alternatives you’d encourage her to consider? For Canadians, what would your retirement savings look like if you lived in America?

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{ 2 comments… read them below or add one }

1

Good question!
I’m actually a Canadian resident working in the US so I actually have a 401k plan. Some of my money has to stay within the groups funds (whose MERs are still significantly lower than any Canadian funds anyway) while the rest of it has been divied up into various Vanguard Index funds.

You might recommend she have a look at the Vanguard Target retirement funds (https://flagship.vanguard.com/VGApp/hnw/content/Funds/FundsVanguardFundsTargetOverviewJSP.jsp). She could buy this fund or create her own but either way, the MER (~0.2%) is pretty low anyway.

I’m curious to see what others think myself. There are definitely more options in the US than what we see in Canada typically.

2

I think 40% bonds is too much. Historically bonds have yielded less than stocks. Bonds are fixed income, they are for retired people who need to plan their revenues ahead and not worry about market fluctuations. If your friend is 30 years away from retirement it seems stupid to have 40% bonds. Unless she can’t bear market fluctuations (the sleep-at-night factor is indeed important), I would advise her much more equity exposure.

Personally I am 100% equity invested and 10 years away from retirement.

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