After publishing my Roth IRA Account overview, I received e-mails from readers asking where I opened my brokerage account and which fund I invested in. Because this money is for my retirement, I’m more geared to taking a hands off approach to my Roth IRA. The easiest way to do so is to invest in a target fund, which automatically reallocates itself every year as you reach closer to retirement.
Fidelity’s Freedom Funds Target Dates
Fidelity freedom funds (aka lifecycle funds) offer the power of diversification by offering you a mix of different Fidelity funds all under one symbol. Currently, Fidelity offers 9 different types of lifecycle funds:
- 2010 Fund
- 2015 Fund
- 2020 Fund
- 2025 Fund
- 2030 Fund
- 2035 Fund
- 2040 Fund
- 2045 Fund
- 2050 Fund
– 2008-2012 retirement date
– 2013-2017 retirement date
– 2018-2022 retirement date
– 2023-2027 retirement date
– 2028-2032 retirement date
– 2033-2037 retirement date
– 2038-2042 retirement date
– 2008-2012 retirement date
– 2048-2052 retirement date
Keep Your Hands Off Until You’re Ready
Once you buy into a freedom fund, you can leave the money there because it’s made up of several Fidelity funds based on allocation, style, and size. Your money is automatically hedged against drastic losses, unlike a stock portfolio that may be overbalanced in a particular sector or style.
Example of Fidelity’s 2050 Freedom Fund Allocation
Key Advantage Over Most Mutual Funds: Low Expenses
Sometimes investors seek out high return funds, but the ultimate downside is that they must pay out excessive fees to buy into the fund. These fees eat up your returns; sometimes cheaper is better.
Funds charge investors fees and expenses. A fund with high costs must perform better than a low-cost fund to generate the same returns for you. Even small differences in fees can translate into large differences in returns over time. For example, if you invested $10,000 in a fund that produced a 10% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years you would have roughly $49,725. But if the fund had expenses of only 0.5%, then you would end up with $60,858 – an 18% difference. It takes only minutes to use a mutual fund cost calculator to compute how the costs of different mutual funds add up over time and eat into your returns. (Source: SEC Investor Tips)
So I would recommend choosing a target date mutual fund if you don’t want to actively manage your retirement portfolio. Even though I manage my stocks, my retirement assets are a whole different entity. Until I find something better, I’m going to stick with the fidelity freedom funds.
While his background is mostly related to trading stocks, he recently gained interest in real estate crowdfunding with Fundrise.