Hey everyone! Long time reader/lurker, answered a few questions on the boards and now I have one of my own. It's only been about a year since I started learning about personal finance and it started with Dave Ramsey classes offered for free on my old military base (and I no longer agree with everything he teaches, but it was a start!)

Anyway, followed Dave's advice and now I've got a few USAA Mutual Funds that are performing well (4.7%, 5.8% and 10.4% YTD respectively) totaling roughly $6000 (including unrealized gains). I didn't know anything about retirement accounts when I started and I don't have one now. I'm about to leave active duty military (currently on terminal leave until July), 26 years old, heading to college in August on the Post 9/11 GI Bill for a Bachelors in Business Admin/Finance and I think I'd be better off putting this mutual fund money into retirement savings. Any excess amount over the $5000 cap will go straight into my Emergency Fund if applicable.

My question is should I stick with USAA? I've heard nothing about them in regards to IRA's. Everyone here seems to point to Vanguard. If I do stay with USAA can I add the mutual funds to an IRA without penalties or do I pay Capital Gains Tax when I make the switch?

And finally I'm not a micro-manager, I just want to set it up and forget about it; what would be the ideal investment(s) at my age (prefer a middle of the road risk tolerance) if I cashed out the mutual funds? People are always suggesting Target Retirement funds that re-balance themselves and/or Index Funds. I'm doing my own research before buying and it won't hurt to have second opinions.

Here's my financial snapshot if it helps:

Debt
$6,600 @ 2.8% (Auto Loan - 2 years into 5 year loan, be paid off by year 3 I hope!)
No Student Loan/Mortgage
Credit Cards carry zero monthly balances, limit 28,000 combined (Use AMEX Blue Cash Pref. for cash-back goodness since most of my non-bill expenses are Groceries and Gas)
I have an Excellent Credit rating

Savings
$3,500 Emergency Fund
$300 a month + windfalls into Savings, Investments and extra Auto Loan payments.

My parents taught me how to save, budget and manage credit so I'm golden there.

USAA does a really nice job in terms of savings and other banking services but they cost more than I like for mutual funds. Everybody here tends to point to Vanguard because they have the lowest costs for funds, and those low costs tend to make their funds perform better over the long haul. But you need to satisfy yourself about that. Compare the expense ratios for the Target Retirement Fund 2040 for both and see for yourself.

Yes, you'll pay taxes when you make the switch. You earned those gains outside of a tax sheltered account; therefore, you'll be taxed when you cash them out.


It depends on how you define "micromanage." Target Retirement Funds are great if you want want to "set it and forget it." I tend to be a little more hands-on. I used index funds and like to take care of the asset allocation myself, but I don't consider myself a micromanager. I just look at it once a year and make adjustments as needed. That's because I tend to be more risk tolerant than most target funds would suggest and I weight my portfolio more toward value, small cap and emerging markets then a typical retirement fund would suggest. If you really don't want to think about it, just pick the Target Retirement fund for the time when you think you'll be retiring. Put some money into it and keep putting money into it every year. But seriously, learn a little bit about investing so you can sleep at night when then markets tank (and at your age, they will tank a few times). Read this and if you have more questions, feel free to come back and ask them.

Wait...you can't put $6,000 into any IRA in one year (at least not at age 26). $5,000 is the max or your total earned income...whichever is less.

my suggestion would be to put $5000 in a Roth IRA. Pay your taxes with the remaining $1000 and anything left from that, put towards the car loan. I'll only say this once, but the best thing you can do is graduate from college debt free. You're on the GI bill, but make sure you don't take on any debt for frivolous things like a nicer apartment, another car, motorcycle etc.

I usually discourage what I am about to say, but the $5000 contribution to the Roth can be accessed if you get into a tight spot. Your goal should be to graduate from college debt free. If you find out in a year or two you have some money to save, you're way ahead!

I also suggest a target date fund. Do NOT pick your target date based on the actual date you think you will need the money. Pick it based on your preferred asset allocation. You can hop from fund to fund later, but get an asset allocation you are comfortable with. This may line up with your "date". If you are at a loss for which asset allocation you want, there are some general rules of thumb like your age - 10 for bond allocation. It is difficult to understand what is best for you without knowing your goals, your stomach for volatility etc.

I can't comment on USAA funds, but I have heard good things about them. I invest mainly with Vanguard.

And educate yourself. I recommend the Boglehead's guide to investing. It has been at every library system I have ever checked. Save some bucks and visit your library.

As someone noted in another Roth-related thread, that is not how target date funds work. All target date funds at a given company past a certain year have exactly the same allocation. They even have the same "glide path" which is the transition from stocks to bonds and eventually some fixed income/cash equivalents. The only difference is what year they enter that glide path.

Different fund companies have different allocations. But then it's a bit harder to compare them.

If you're just going to use a simplistic rule of thumb like "age minus 10 in bonds" you might as well just let a reasonably reputable fund company do it for you.

I really don't like those rules of thumb. How does the guy who made up that rule know anything about your goals? He doesn't - he is assuming everything. And even if he had perfectly assumed your risk tolerance, when you will need the money, whether or not you have a pension, when and how much Social Security you will get, and everything else about you, it seems highly unlikely that the underlying statistics of the market will result in a nice round number like that being optimum.

Until you are 10 years or so from needing income from your investments, bonds don't make much sense.

And I would not bother with the Target Date fund. There are minor problems with them (doubled fees) but I don't worry so much about that as I do that, by having other investments besides the target fund, you are defeating the asset allocation that you are presumably paying for.

Understood. But, if you were age 25 in 2012 and planning to retire in 40 years do you invest in the 2050 fund? What if you want more bond allocation? What if the allocation of the 2035 fund is more to your liking? And then, to keep things more or less constant, you can hop to the 2040 fund? That is what I meant when I said to pick on the allocation you like now and you can always "hop" to another fund. I apologize if that wasn't clear.



Sorry for the vain move here, but I think you took some context out of what I said, so I think it deserves to be put back into context by me quoting myself.



Rules of thumb have their place. Ideally we'd all be as educated as Le DoingHomework and wouldn't need them. But until we can all reach that highest step on the retirement planning taxonomy and join DoingHomework, maybe, just maybe, rules of thumb have their place. So you don't like bond allocation = age -10? But it's ok to recommend no bonds ("Until you are 10 years or so from needing income from your investments, bonds don't make much sense.")? I could go into efficient frontiers and point out that bonds do make sense for people who like to sacrifice small & marginal return for huge reductions in volatility, but that would require going into modern portfolio theory, which we would then have to discuss efficient market theory so on and so forth. But how does this help the poor guy who asked a simple question? So yes, pick your rule of thumb. If you don't like the one I offered up pick another one. But, please, OP, educate yourself.

Unfortunately, the OP is now stuck in a pissing match. With only $5000 to invest in an IRA, he has been recommended to invest in a target date fund and not to. DoingHomework dislikes them. I dislike them as well. But, I also believe they have their place. And the place is for people like the OP. Unfortunately, because of fund minimums, if the OP decides a target date fund isn't for them, they will have to decide which single fund to put All $5000 into. I would much rather see a target date fund than just Vanguard's total stock market fund. While you can do much worse than the total stock market fund, I would rather be diversified. You'll be missing out on the international sector and bonds. The price of diversifying with a small amount of money at Vanguard is an expense ratio of 0.19%. You can also do much, much worse ER wise. and if you had more money, you can do better as well.

JMHO.

But selecting a bond allocation to meet a specific risk reduction or income target does make sense. It's arrived at by considering the situation rather than making wild general assumption based on one variable like age.

As for helping the OP, he (or she) is selecting the allocation by buying the target date fund. My suggestion is merely not to muck that up by also buying a stock fund.

1. Buy the target fund (or total stock market fund) for now.

2. Educate yourself. Educate yourself. Educate yourself.

3. Re-evaluate every year based on your new knowledge, your personal goals, and current as well as expected future conditions.

This advice works for most 20-somethings and is essentially what I did/do.

This is always generally my advice as well.

To borrow from JD, seeing as the perfect is the enemy of the good and action generally beats inaction, do what is easiest/most comfortable to start with NOW. (Especially for tax-advantaged accounts where the cost of moving funds around later is minimal.) For lots of people that's a target fund.

Then educate, read, and decide what you really want and believe in.

Then move your funds appropriately.

If you're talking a taxable account, I'd probably recommend the same idea, but go with a total stock market index fund. Once you know what you want, use new contributions to get yourself there. It's unlikely a total stock market fund wouldn't have a place.

Love USAA for banking. Not positive it's the best for investing for the long-term. I'd suggest an in-kind asset transfer to Vanguard or T. Rowe Price. But keep your USAA for your banking needs!