Is a TDF a good choice for growing my money, in this case? I plan to use it for a house down payment and withdraw it in 5-7 years. I’ve been thinking of putting it in a 2030 or 2035 TDF. Should I go this route or just VTSAX and chill?
Background: USA, I will be saving in a taxable account, and I want to minimize my tax liability as much as possible.
Any stock based investment is more risky for short-term saving as there is no guarantees of returns and potential drops in value. For long term savings, the dips can be waited out and on average have historically gotten good return over the long run. For shorter term savings you could consider fixed income like CDs. While the rates are lower, they are guaranteed so you will have your money when you need it
Thank you. My idea is to grow the funds and move them to CD/HYSA when I start looking. I don’t plan to stay in my current city longer than 10 years, and for that time frame renting is more economical.
I say no.
A TDF is just a mix of stocks and bonds, which gets more conservative as it gets closer to the target date. In the current climate, you should expect bond rates to drop for the next year or two as the fed cuts rates, and there are concerns of a significant market correction in stocks if there’s weakness in the labor market. Add to it that TDFs are intended to be placed in tax-sheltered retirement accounts, so there may be a bit more taxable churn than other funds.
That said, if you’re not sure you’ll actually need it in 5-7 years and may hold out longer, there’s no problem investing that money. But if there’s a decent chance you’ll need it before 5-7 years, investing it would have a bit too much risk for me.
So here’s my advice:
- if you could wait longer than 5-7 years if needed, go with 100% stocks - far riskier than a TDF, but if there’s a correction in the next couple years, you’ll be buying on the way down and could end up having a larger down payment in 5-7 years, or you could need 8-10 years if the market corrects in 5-7 years (i.e. soft landing for now)
- if 5-7 years is a harder timeline, it should go into safe investments - CDs, treasuries (yields are falling, but whatever), etc
I could certainly wait longer than 5 years if necessary. It depends on where life takes me.
VT or VTI would be more tax-efficient than a TDF, then. I could diversify in another way: put some percentage of money into VT, and then the rest into, say, a CD ladder. Maybe start out with VT then taper towards CDs/treasury bills around the 3-to-5-year mark. A DIY TDF, if you will. (I suppose that’s the “personal” in personal finance.)
Thank you for sharing your perspective!
Yup, that’s basically what I’d do. And instead of “tapering,” I’d just sell and “freeze” the assets in CDs/treasury bills once you have a firm timeline less than 5 years. The extra year or so of potential gains isn’t really worth the risk of a major correction just before buying.
Makes sense!
I prefer etf’s like vti, or spy. Maybe spyg of you’re bold. Be ready to stare at losses though, maybe for a while and ask yourself if you can stomach that.
What vehicles do you use for non-retirement savings? I’m happy to learn.
Ok, so… I generally will buy stuff that I think might be a good investment, then sell it at a point where it seems like it’s made enough money. When I sell it I reinvest that into vti, with leftover money in spyg.
A recent example was AMD. I bought maybe 100 shares or so of AMD after they were announced as the Tesla supplier, I think 2021? Sold it after it hit 105% ROI. Put most of the money in VTI, the rest of the money in SPYG.
Rinse repeat.
Not rich, but richer than I was.
Thanks for sharing!