How Vanguard will save me $2700

Heinz Doofenshmirtz
Heinz Doofenshmirtz

I have a confession.  So far on this site I’ve been sitting here, tooting my own horn telling how disciplined and smart we’ve been with our money and I even had the nerve to make the following rule within my Wealth Manifesto:

9.  Do not invest in individual stocks – invest in low-expense mutual funds that support your targeted asset allocation mix.

The truth is I really haven’t paid much attention to the costs of the funds that we’ve been investing in for the past 15 years.  Sure, if I was comparing two funds that looked similar, I’d usually pick the one with the lower cost.  But beyond that, my thinking was always that as long as the expense ratio was under 1.0 that it wasn’t really that big of a deal.

Well Dr. Heinz Doofenshmirtz!  How could I have understood the exponential power of compound interest for this long but not recognized that mutual fund costs have the same effect, but in a negative way that can take a serious chunk out of my accumulated nest egg?  And it only gets exaggerated over time!

ExpenseRatio

My Money Makeover

I’ve finally come around and have some big changes afoot.  In an attempt to turn my eye toward the “low-expense” part of the equation, I met with Vanguard and together we came up with a plan.

Background

Up to this point, all of my retirement savings have been at USAA and all of my wife’s have been at Fidelity.  I reached out to Vanguard and gave them some background information.  Because of the dollars we potentially would be bringing over, they offered to perform a free detailed financial plan with one of their Certified Financial Planners (CFP).  Apparently if you invest a minimum of $500,000 in Vanguard assets, you can qualify for their Voyager Select Services which offer these types of benefits.  Great.

Prior to our session, I completed an online questionnaire that evaluated our tolerance for risk (high), outlined our existing holdings, and our plans for the future including desired retirement date, expected social security, and college savings expectations for our kids.  Also, I made it clear that I had two main goals:  1) simplify our portfolio and 2) only invest in Vanguard’s ultra-low cost index funds that can be purchased as Admiral shares.

The ‘Before’ Picture

Now, financially we didn’t look all that frumpy and unkempt.  Maybe just a little outdated – kind of like someone straight out of the 1990’s with feathered hair and an untucked plaid flannel shirt.

Number of Unique Holdings:  34  (31 mutual funds, 3 ETFs)

Weighted Effective Expense Ratio:  0.63  (highest: 1.27, lowest: 0.05)

Yearly Expense Fee:  $4,000

Target Asset Allocation:  87% Stocks, 13% Bonds

Asset Allocation - Before
Asset Allocation – Before

The ‘After’ Picture

As soon as all of our funds are successfully ported over to Vanguard, it’ll be the equivalent of getting a new, stylish outfit and a fresh haircut.

Number of Unique Holdings:  Six (6) – four are Vanguard, two are elections within my 401k

Weighted Effective Expense Ratio:  0.17  (highest: 0.55, lowest: 0.05)

Yearly Expense Fee:  $1,300 (a savings of $2,700)

Target Asset Allocation:  80% Stocks, 20% Bonds

Asset Allocation - After
Asset Allocation – After

Asset Allocation & Fund Specifics

You may be wondering…how did you come up with your desired asset allocation?  Good question.

The first step in getting there is understanding how aggressive we wanted to be with respect to our stock/bond split.  An 80/20 split here is still considered aggressive.

Within the Stock category, that leaves options for U.S. Large Cap, U.S. Mid/Small Cap, and International.

Within the Bond category, we have basically a distinction between U.S. and International bond options.

In order to accommodate the target percentages, we will be investing in the following 4 core funds:

  • VTSAX – Vanguard Total Stock Market Index Fund (Admiral Shares – 0.05 expense ratio)

At last glance, this fund invests in over 3,400 stocks across all sectors and across all sizes of companies within the U.S. market.  It is comprised of approximately 72% Large Cap and 28% Mid/Small Cap companies.

  • VTIAX – Vanguard Total International Stock Index Fund (Admiral Shares – 0.16 expense ratio)

This fund invests in over 6,500 stocks across all sectors and across all sizes of companies around the world (top three locations being 45% Europe, 28% Pacific, 19% “emerging markets”).  I like the idea of owning a portion of large, successful non-U.S. companies like Samsung and Toyota Motor Corp.  Many of which also do business in the U.S.

  • VBTLX – Vanguard Total Bond Market Index Fund (Admiral Shares – 0.10 expense ratio)

This fund invests in almost 6,000 U.S bonds of all maturities (short, intermediate, and long term) with about 70% invested in government bonds and 30% in corporate bonds.

  • VTABX – Vanguard Total International Bond Index Fund (Admiral Shares – 0.20 expense ratio)

Prior to my meeting with Vanguard, I didn’t even realize International Bond funds were necessarily an option and not something I’ve owned in the past.  It seems this is a relatively new offering and invests in over 1,350 non-U.S. bonds primarily in developed countries.

I still have about $170,000 wrapped up in my employer’s 401k.  Unfortunately it does not offer these funds so I’m stuck choosing from only those options available to me.  I need a larger representation of International Stocks and U.S. Bonds so I will have that allocated as such:

  • International Stock Fund (0.55 expense ratio)
  • U.S. Bond Fund (0.46 expense ratio)

While I’ve spared you several details and ‘percent-of-a-percent’ level of mathematics, this takes a bit of spreadsheet gymnastics to figure out the right dollar amounts that should be in each fund given the target asset allocation.

As you can see, I’m a big fan of diversification.  With apologies to President Obama and the name of his policy on energy, I like to refer to this latest approach as my “All of the Above” Investment Policy.  I guess the only things missing may be precious metals and P2P investing, but I’ll save that for another day.

Takeaways & Learnings

  • By going to an 80/20 stock/bond split, I will actually be slightly more conservative than I am now (currently around an 87/13 split).
  • You’ll notice I no longer have any specific sector represented in my target allocation (I used to target and own REIT funds).  This is because VTSAX (total stock market fund) already has every industry represented in it.  To prove this, you can look at Vanguard’s REIT Index Fund (VGSLX) and see that all 126 holdings in this fund are also found in VTSAX.
  • Cash reserve (money market) funds at brokerages like those at Fidelity, USAA, and Vanguard all have expense ratios associated with them (0.38, 0.65, and 0.16 respectively).  This was news to me.
  • My effective expense ratio is still a little high (at 0.17) and should go down once I stop working and roll my 401k into existing Vanguard accounts and feather that money into the 4 core funds at the appropriate percentages.  This should bring our effective expense ratio of the entire portfolio down to 0.09 nearly cutting our expenses further in half.
  • While I won’t be incurring such large expense fees going forward, I will be incurring a one-time account “closing” fee for each retirement account that is ported over to Vanguard as well as some fees associated with liquidating our positions.  The closing fees range from $20 to $50 per account and we have five (5) total to move.  I also found out that liquidating any non-USAA funds in my USAA brokerage account will incur $45 each.  Just today I sold six of these for a total of $270 in transaction fees.  Ouch.

Darn fees.  I look forward to not needing to deal with this in the future.  The good news is that I should be able to make up the cost of them well within the first year of operation at Vanguard.

  • This is the first time I’ve sat down and calculated my weighted effective expense ratio across our entire portfolio.  I wish I had done this exercise earlier – it truly is enlightening.
  • While I haven’t been able to figure out a way to accurately estimate the cost of not moving to these low-cost funds sooner, my off-the-cuff guess is that this has cost us at least $10,000 over the last 15 years.  I guess the good news is that now we know and can be sensitive to it so we can enjoy the next several decades of growth with limited erosion due to expense fees.

Please feel free to put any comments, questions, or recommendations you may have for us in the Reply area.  Thanks for reading.

21 thoughts on “How Vanguard will save me $2700”

  1. Congrats on the new portfolio. Very sharp and classic look that will never go out of style.

    I’m curious. Many of my readers report bad attitudes, foot-dragging, arguments, hard-sell tactics and the like from their current investment companies when they make the move to Vanguard.

    Did you? And if so, any tips on how they can best handle such nonsense?

    1. I like that. If there were one phrase that I would want my portfolio to be described as it would be a “classic look that will never go out of style”. Describes perfectly what I am going for. We’ll see how it goes as I’d like to leave it pretty well untouched and untweaked for a long while.

      I tell you what, I cannot say enough positive things about USAA as a company. I’ve been a member since 1997 and have used them for just about everything finance related (insurance, banking, mortgage, brokerage, etc). They called me today confirming the request they received from Vanguard was legitimate, and then proceeded to tell me the cheapest way to liquidate my assets (selling the ETFs myself online was more cost effective than doing it over the phone).

      Without batting an eyelash, we had walked through selling everything. It wasn’t until the very end when the representative politely asked if he could note a reason why I was moving my retirement accounts to Vanguard as he “wanted to make sure it wasn’t anything USAA had done” that forced my business elsewhere. I told him my situation, he completely understood, and wished me well.

      If USAA somehow offered Vanguard Admiral shares, I would not have left.

    2. As a person who just moved all his retirement assets held in Fidelity to Vanguard, I had the personal assistance of a Vanguard Concierge Services representative who ‘phoned Fidelity for me in a conference call, with me on the phone to confirm everything and the Vanguard representative drove the whole process. It was very easy and very fast.

      If you will end up with significant assets in Vanguard after the movement of funds, give Vanguard a call and ask if they can help.

      1. I had the same experience when I was helping my Dad do something similar. VG got all parties on a conference call and sorted it out that way.

  2. Buck, you’re smarter than me and I have quite a few years on you!!! I also use Vanguard for my retirement and investment accounts and I am aware that they are a low-cost leader. However, I haven’t done near the research and analysis you clearly have done. My hat is off to you!

    I should be able to roll a 401k over to Vanguard in the next several months and that will allow me to be in the Voyager Select Services “club” so I’ll be sure to use all the free services they can heap on me.

    This was a fantastic post…really informative and very well thought out.

    Thanks!
    Ree

    1. Hi Ree. Thanks for the kind comments.

      Once you are ready to roll over your 401k, I would suggest calling them and telling them your situation so that you can get their advice prior to actually doing the rollover so you have a game-plan going in. It’s always good getting a second set of (CFP qualified) eyes on your plans to make recommendations.

      My favorite part of the financial plan ‘deliverable’ was a simple little meter entitled “Your Retirement Outlook” and looked like the gas gauge on your car that was labeled 0% to 100%. Where the needle on the gauge lands tells you what the likelihood was of meeting your goals (given your answers/input to the questionnaire) provided VG’s “test scenarios”. Any scenario that lands in the green section of the gauge has a probability of 85% or greater in succeeding. I’m happy to report, our results landed in the green. Ha!

  3. I love this post on how to eliminate the expense fees in my retirement accounts. In addition to the fees associated with the mutual funds themselves, my wife and I have been using a financial planner and have been paying him a commission also (through buying A shares?). Right now most of our retirement is locked up in employer sponsored accounts like 401k’s and 457’s and that money is limited to the funds that they offer inside their particular fund families. The 2 Roth IRA accounts that our financial planner has set up for us do not have too much money in them right now and you have inspired me to do some more research and find some low cost index funds like the ones you have highlighted at Vanguard for these accounts. When our financial planner talked about commissions and fund fees it was more of an ‘abbreviated side topic’ that was very vague and confusing. Looking back, that entire conversation seemed forced and masqueraded.

    The aspect of your post that intrigued me was when you spoke of ‘spreadsheet gymnastics’ and calculating the weighted effective expense ratio across your portfolio. Would you be willing to elaborate further on how you calculated (which numbers you used and where you found them. Can they be found in prospectuses or annual reports?) and how you arrived at the ‘Yearly Expense Fee’ and “Weighted Effective Expense Ratio” totals in your examples above?

    It looks like I have some spreadsheet gymnastics and a date with a calculator in my future…

    1. Thanks for stopping by, Kyle. Before I try to answer your question, my suggestion would be to dig around and ask your planner about the total fees you are incurring – both from your investments and for his/her services. From there you can determine if the cost is worth the service.

      For simplicity sake, let’s take the following example: $20K in VTSAX (total U.S. stock) and $10K in VTIAX (total Int’l stock). What is the weighted expense ratio and asset allocation of this portfolio?

      VTSAX has a yearly expense ratio of 0.05, VTIAX’s is 0.16 and can be found pretty easily on any financial site (like Vanguard, Google Finance, or Morningstar). This means the weighted expense ratio is (($20K * 0.05) + ($10K * 0.16)) / ($20K + $10K) = 0.0867. In other words, this $30K portfolio will incur $26 in fees per year (remember the expense ratio is actually a percent, $30K * 0.0867%).

      Defining asset allocation for these “total market” funds is a little trickier. To do this, I found the following breakdown at Morningstar. For VTSAX (total U.S. stock market) you can see they break down the fund as such: 41.42% Giant Cap, 30.50% Large, 19.47% Medium, 6.20% Small, 2.41% Micro. If we lump Giant and Large together we get about 72% of the fund in what I’ll classify as ‘Large Cap’ and the remaining 28% as ‘Mid/Small Cap’.

      This means our portfolio is made up of:
      48.0% U.S. Large Cap ($20K * 0.72) / ($20K + $10K)
      18.7% U.S. Mid/Small Cap ($20K * 0.28) / ($20K + $10K)
      33.3% International

      This is difficult to explain in words so if you have additional questions, feel free to email me via the Contact form. I’d be happy to provide my spreadsheet as a template.

    1. Hi Mark. No, I didn’t consider VASGX. I find it somewhat strange that in my planning session with Vanguard, that they didn’t mention it either. I suspect because I had put such a strong emphasis on Admiral shares and super-low expense ratios, that perhaps they didn’t bother bringing it up. It certainly looks familiar, though, and closely mimics not only the exact funds but the asset allocation percentages of my target as well.

      My general thoughts regarding these types of all-in-one funds is that I like the idea of them but found that if I was willing to self-rebalance (something I tend to do yearly), it would always be cheaper to do that. Although I’m encouraged to see VG’s very competitive 0.17 expense for this particular fund. This is exactly where I’m at now but I should be able to beat it once I stop working at my current employer where I should be able to drop it down below 0.10.

      Thanks for taking the time to comment and letting me know about VASGX. If I ever need to simplify, I know my next best option.

    1. Hi Jacob – check the comment immediately above yours where Mark asked the same thing for the long response. The quick response is this: 1) I didn’t know about it at the time and 2) I’m fine managing it myself and will be able to piece it together for a total expense under 0.10 once I roll over my 401K this summer.

  4. Great article. It is certainly making me rethink my investment strategy and the fees I currently pay.
    Have you created any 529 plans with Vanguard during this planning session?

    1. Hi Sebastian. We are not using Vanguard for our 529 plans. We’ve elected to use our state-sponsored program that is hosted by TIAA-CREF. We’re invested in their Index-Based Aggressive Portfolio which carries a respectable 0.22 expense ratio and we can deduct contributions up to $3K from our state income tax returns. In my brief research with VG, it seems their equivalent fund costs 0.21 but we wouldn’t get the tax deduction. Good question.

  5. Did you carry any TSP? If so what’d you do with it.
    (guessing since you talked about USAA you were in the Military) What’s your take on TSP?

  6. Hey Buck, I use a TDAmeritrade account and invest in VTI and BND. You probably know that these are the EFT’s of the Vanguard funds. Is there a downside to this?

    1. A quick look shows the expense ratios for VTI and BND are the same as their index counterparts so from a cost perspective, I think it is a wash. The bigger decision is the use of EFT vs Index, which has its own set of pros/cons.

Your Thoughts?