Archives for May 2019

Quick announcement: the 2019 edition of Social Security Made Simple is now available on Amazon. To be clear, there haven’t been any major changes to Social Security since the Bipartisan Budget Act of 2015, so as with last year’s edition, the updates are relatively minor.

For anybody who has not read the book, the outline is as follows:

Part One: Social Security Basics
1. Qualifying for Retirement Benefits
2. How Retirement Benefits Are Calculated
3. Spousal Benefits
4. Widow(er) Benefits
Part Two: Rules for Less Common Situations
5. Social Security for Divorced Spouses
6. Child Benefits
7. Social Security with a Pension
8. The Earnings Test
Part Three: Social Security Planning (When to Claim Benefits)
9. The Claiming Decision for Single People
10. When to Claim for Married Couples
11. The Restricted Application Strategy
12. Age Differences Between Spouses
13. Accounting for Investment Returns
Part Four: Other Related Planning Topics
14. Social Security and Asset Allocation
15. Checking Your Earnings Record
16. How Is Social Security Taxed?
17. Do-Over Options
Conclusion: Six Social Security Rules of Thumb
Appendix A: Widow(er) Benefit Math Details
Appendix B: The File and Suspend Strategy
Appendix C: Restricted Applications with Widow(er) Benefits

You can find the print edition here and the Kindle edition here.

A reader writes in, asking:

“I started a Roth IRA last year, and I currently own the Vanguard Target Retirement 2060 fund. I am planning to add a second fund this year to improve diversification. What would your suggestion be?”

Short answer: I probably wouldn’t add a second fund.

When the entire portfolio is allocated to an all-in-one fund (such as a target date fund or a Vanguard LifeStrategy fund), you don’t have to do any rebalancing, because the fund does it for you automatically. Once you add a second fund to the mix, you will have to rebalance. And once you’ve decided that you don’t mind rebalancing periodically, you might as well just go with a DIY allocation of individual index funds/ETFs anyway, so that you can get the lower expense ratios relative to an all-in-one fund.

Second, adding a new fund would probably not improve diversification in the sense of spreading your money out over a greater number of underlying securities. With a Vanguard Target Retirement fund, you already own four different “total market” funds (U.S. stocks, international stocks, U.S. bonds, and international bonds). For example, adding an allocation to the Vanguard Value Index Fund or the Vanguard Small-Cap Index Fund wouldn’t add any more stocks to the portfolio, because the stocks owned by those funds are already owned by the Vanguard Total Stock Market Index Fund (and therefore owned by your Target Retirement fund).

That said, some people have allocation preferences that are different from “total market” weightings (e.g., they prefer to overweight small-cap stocks relative to their market weighting). And some people have different allocation preferences among the four “total market” components (e.g., they prefer a larger or smaller allocation to international stocks or bonds than what you’d have in your Target Retirement fund).

But target retirement funds are explicitly designed with the goal of being suitable for the “typical” investor. If you can’t articulate something that would make your needs/preferences different from most other people — if you can’t already articulate a particular reason for you to stray from a simple total market allocation such as the one in your Target Retirement fund — then there’s generally no need to do so.