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When I set up a 401k a few years ago, my options were pretty limited, so I simply went with a lifecycle target retirement date fund (exp ratio of 0.12%). However, I now see I can choose a passively managed S&P 500 Index fund with an expense ratio of 0.02%.

I am 24, single, have no debt, my employer matches the first 6% for 401k, and have a roth 401k option. I am also maxing out my Roth IRA into a Vanguard 2050 fund.

After reading a bunch of questions/answers here I am having a hard time understanding why I should not simply put all my 401k (roth and non-roth) into the S&P 500 Index for the near future.

I understand automatic diversification is an advantage of the target retirement type fund (though the bulk of the 2050 range are in stocks, similar to the S&P 500). I also understand a purely S&P based 401k is not ideal when I am considerably closer to retirement.

  • What factors should someone (especially younger) consider when determining whether to choose a lifecycle 401k option vs an index-type fund?
Chris W. Rea
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enderland
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1 Answers1

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I think we resolved this via comments above. Many finance authors are not fans of target date funds, as they have higher fees than you'd pay constructing the mix yourself, and they can't take into account your own risk tolerance. Not every 24 year old should have the same mix.

That said - I suggest you give thought to the pre-tax / post tax (i.e. traditional vs Roth) mix. I recently wrote The 15% solution, which attempts to show how to minimize your lifetime taxes by using the split that's ideal for your situation.

JoeTaxpayer
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