Invest In Your Future: Target Retirement With Fidelity

Target-date funds are a popular choice for investors saving for retirement. These funds are designed to simplify retirement investing by offering a diversified portfolio of stocks and bonds that gradually adjusts its asset allocation from risky to conservative as the investor gets closer to retirement. Fidelity Freedom Funds are target-date funds that offer a complete portfolio in a single investment. These funds are designed to take the guesswork out of investing for retirement by providing a hassle-free way to invest. Fidelity's investment team gradually shifts and regularly rebalances the asset mix of each fund, ensuring that investors do not have to actively manage their investments. This makes Fidelity Freedom Funds an attractive option for those who want a hands-off approach to retirement investing.

Fidelity Freedom Funds

Fidelity has been managing the Freedom Funds since 1996 through a range of market cycles and has developed a strategy that allows investors to potentially benefit from both a disciplined approach to fund management and the experience and judgment of their fund managers. The fund managers take a long-term approach to key asset allocation decisions while also reviewing each portfolio daily and making adjustments as needed.

It is important to note that investing in a Fidelity Freedom Fund is not guaranteed, and there is a risk of losing money, including near, at, or after the target retirement date. The fund's share price fluctuates, and there is no guarantee that it will provide sufficient retirement income.

Diversified portfolios

Fidelity Freedom Funds are designed to simplify retirement investing. They are a type of target date fund, which is a "set it and forget it" retirement savings option that removes the need for investors to decide on a mix of assets and rebalance those investments over time. Each fund invests in a mix of different types of assets, offering growth potential while helping to reduce risk.

Fidelity Freedom Funds are a single-fund investment strategy that can help take the guesswork out of building and maintaining an age-based retirement portfolio. They are named according to their target retirement year, with each fund designed for investors planning to retire in that year. For example, the Fidelity Freedom 2050 fund is for those planning to retire in 2050.

These funds are designed to be a complete portfolio in a single fund, with each fund investing in a mix of different types of assets, including stocks, bonds, and money market accounts. The funds are professionally managed, with Fidelity's investment team gradually shifting and regularly rebalancing the asset mix of each fund to provide a hassle-free way to invest.

As investors get closer to retirement, the asset allocation becomes more conservative to preserve wealth. This means a higher proportion of bonds and other lower-risk investments, and a lower proportion of stocks and other higher-risk, higher-return investments. This shift in asset allocation is known as the fund's glide path.

Fidelity Freedom Funds are suitable for those who want to take a hands-off approach to their retirement investments and want the convenience of a single fund that manages their asset allocation for them. However, it is important to note that target date funds, including Fidelity Freedom Funds, may have high fees, and it is important to evaluate the costs of different funds before investing.

Choosing the right fund

• Retirement timeline: The first step is to determine your anticipated retirement year. Target date funds are typically named with the target retirement year in mind, such as Fidelity Freedom 2050 for those planning to retire around 2050. Choose a fund that closely aligns with your expected retirement age.
• Glide path: Understand the fund's glide path or the strategy it uses to shift from riskier investments to more conservative ones over time. Some funds may have a "to" glide path, where the asset allocation remains fixed once the target retirement year is reached, while others may have a "through" glide path, continuing to adjust the allocation even after the target date.
• Investment strategy: Different funds use various investment strategies, such as actively or passively managed funds, or a blend of both. Actively managed funds may have higher fees but offer more tailored investment choices, while passively managed funds tend to have lower fees and follow market indices.
• Fees and expenses: Consider the expense ratios and management fees associated with the fund. Target date funds can have higher fees than other investment options, so it's essential to understand the cost structure. Compare the expense ratios of different funds to find the most cost-effective option.
• Diversification: Evaluate the diversification of the fund's portfolio. Look at the mix of stocks, bonds, and other assets to ensure it aligns with your risk tolerance and investment goals. Some funds may become too conservative near the retirement date, potentially impacting your returns.
• Performance and ratings: Research the historical performance and ratings of the fund. While past performance doesn't guarantee future results, it can give you an idea of how the fund has fared over different market cycles. Consider seeking out independent ratings and assessments from reputable sources.
• Your risk tolerance: Assess your own risk tolerance and ensure the fund's strategy matches your comfort level. If you are comfortable with taking on more risk, you may prefer funds with a higher allocation to stocks or other growth-oriented investments. If you prefer a more conservative approach, look for funds with a higher proportion of bonds and fixed-income assets.

Remember, it's essential to carefully review the fund's prospectus, investment objectives, risks, charges, and expenses before making any investment decisions. Consulting with a financial advisor can also help you navigate the different options and choose the right target date fund for your retirement goals.

Costs and fees

When investing in target retirement funds, it is important to consider the costs and fees associated with these funds, as they can impact your overall returns. Here is a detailed overview of the costs and fees you may encounter when investing in target retirement funds, specifically focusing on Fidelity:

• Initial Deposit: When investing in a target-date fund, you may be required to make an initial deposit or minimum investment. The amount can vary depending on the fund provider. For example, the minimum investment per Target Retirement Fund at Vanguard is $1,000. Fidelity Freedom Funds, on the other hand, do not have any initial purchase minimums, allowing investors to start with smaller amounts.
• Expense Ratio: The ongoing fees associated with target-date funds are typically expressed as an expense ratio, which is an annual fee calculated as a percentage of your investment. This expense ratio covers the fund's operating expenses, such as management fees, administrative costs, and distribution expenses. According to Morningstar research, the average target-date fund had an expense ratio of 0.52% in 2020. However, these fees can vary, ranging from as low as 0.1% to more than 1.5%. It's important to compare the expense ratios of different funds, as higher fees can eat into your investment returns over time.
• Management Fees: In addition to the expense ratio, some target-date funds may charge separate management fees. These fees are typically included in the fund's gross expense ratio but are worth scrutinizing. Fidelity, for example, provides ongoing professional management for their Freedom Funds, gradually shifting and rebalancing the asset mix to provide a hassle-free investment experience.
• Sales Commissions: Some target-date funds may charge sales commissions when you buy or sell shares. It is important to look for funds that do not charge these commissions, as they can add to your overall costs.
• 12b-1 Fees: Be mindful of target-date funds that charge additional distribution and service fees, often referred to as 12b-1 fees. These fees are intended to cover the fund's marketing and distribution expenses. However, they can add to your costs, so it's advisable to choose funds that do not include these types of fees.
• Other Fees: Besides the fees mentioned above, there may be other costs associated with investing in target-date funds, such as account maintenance fees, transaction fees, or redemption fees. It is important to carefully review the fund's prospectus or offering documents to understand all the fees involved.

When considering costs and fees, it is essential to compare different fund providers, as they can vary significantly. Additionally, remember that the fees you pay will depend on the specific target-date fund you choose within a provider like Fidelity. Therefore, evaluating the fees of multiple funds with similar target retirement dates can help you make an informed decision.

Advantages and disadvantages

Advantages of Target-Date Funds

Target-date funds are a popular choice for investors saving for retirement. They are designed to be the only investment vehicle that an investor uses to save for retirement. Here are some advantages of target-date funds:

• Simplicity of Choice: Target-date funds are simple to choose and operate. You just need to pick a fund that matches your planned retirement year, and the fund will automatically adjust its asset allocation as you get closer to retirement.
• Diversification: Target-date funds invest in a mix of different types of assets, offering growth potential while helping to reduce risk.
• Something for Everyone: Target-date funds offer a variety of options, including active and passive management, exposure to different markets, and a selection of asset allocation strategies.
• Hands-off Approach: Target-date funds are ideal for investors who want a hands-off approach to their retirement investments. The funds automatically rebalance and adjust over time, so you don't need to actively manage your investments.
• Discipline: Target-date funds help investors stay disciplined in their investment choices and avoid the temptation to frequently change their fund allocation.

Disadvantages of Target-Date Funds

Despite their popularity, there are several disadvantages to consider before investing in target-date funds:

• Not All Funds Are Created Equal: Different funds with the same target date can have significantly different holdings and investment strategies. It's important to look beyond the target date and carefully evaluate the underlying investments, fees, and investment style of each fund.
• Limited Investment Choices: Target-date funds typically offer a one-size-fits-all strategy, and investors are not actively involved in choosing the specific investments in the fund.
• Potential for Overly Conservative Allocation: Some investors may find that target-date funds become too conservative near the retirement date, potentially impacting their ability to meet their retirement income goals.
• Lack of Customization: Target-date funds may not be suitable for investors with unique financial situations or those who require a more customized investment strategy.
• Risk of Double-Dipping: If you have other retirement investments, you need to be careful that they don't skew your overall asset allocation. For example, if you invest in a certificate of deposit outside of your target-date fund, it can unintentionally change your overall stock and bond allocation.
• Fees and Expenses: Target-date funds can have varying fees and expenses, and these costs can add up over time. It's important to carefully review the expense ratios and fees charged by different funds before investing.

Frequently asked questions