this post was submitted on 25 Sep 2024
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TDF for house down payment (self.investing)
submitted 1 week ago* (last edited 1 week ago) by berryjam to c/investing
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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.

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[–] [email protected] 2 points 5 days ago (1 children)

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
[–] berryjam 2 points 5 days ago (1 children)

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!

[–] [email protected] 2 points 4 days ago (1 children)

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.

[–] berryjam 1 points 4 days ago

Makes sense!