Fidelity Target Date Funds are a type of mutual fund designed to help investors save for retirement by automatically adjusting their investment allocation based on their target retirement year.
These funds typically invest in a mix of stocks, bonds, and other assets, and the allocation shifts over time to become more conservative as you approach retirement.
- Target Date: The fund’s allocation will change gradually, becoming more focused on safer, income-generating investments as you get closer to retirement.
- Automatic Rebalancing: The fund’s manager adjusts the portfolio automatically over time, so you don’t have to worry about making adjustments yourself.
How do Fidelity Target Date Funds work?
Fidelity Target Date Funds are managed with a specific target date in mind—typically around 5 years before or after the retirement year indicated by the fund. These funds start with a higher allocation to stocks for growth and gradually reduce stock exposure as you approach your target retirement year.
- Growth Phase (younger years): The fund is more aggressive, investing a significant portion in equities to maximize growth potential.
- Transition Phase (approaching retirement): As you near the target date, the fund gradually becomes more conservative, reducing exposure to stocks and increasing bonds.
- Retirement Phase: The fund becomes more focused on preserving capital, with a larger allocation to bonds, cash, and income-producing assets.
By automatically adjusting the asset allocation over time, these funds provide a hands-off approach to saving for retirement, making them ideal for those who prefer not to manage their investments.
Choose the Right Fidelity Target Fund
Choosing the right Fidelity Target Date Fund largely depends on the year you plan to retire. Here’s how to make the best selection:
- Consider Your Retirement Date: Fidelity offers a range of funds for different target years, such as Fidelity Freedom 2040, 2050, 2060, etc. Choose the fund whose target year is closest to the year you expect to retire.
- Look at the Fund’s Risk Profile: The further away your retirement date is, the more aggressive the fund will be. If you’re younger and have a long time before retirement, you can afford more risk, so a fund with a later target date (e.g., Fidelity Freedom 2060) may be appropriate.
- Review Fund Fees: While Fidelity’s Target Date Funds generally have low fees, it’s important to compare expense ratios across different funds. Lower fees typically mean more of your money.
If your financial situation changes (e.g., a salary increase or a life event), you may want to adjust your contribution amounts to ensure you are saving enough for retirement.
Monitor and Adjust Fidelity Fund
Although Fidelity Target Date Funds are designed to be a “set it and forget it” investment, it’s still important to monitor your portfolio occasionally to ensure it aligns with your retirement goals. Here are a few tips:
- Review Your Progress: You should review your Fidelity Target Date Fund periodically to ensure it is meeting your expectations and that your retirement goals are on track.
- Adjust Contributions: If your financial situation changes (e.g., a salary increase or a life event), you may want to adjust your contribution amounts to ensure you are saving enough for retirement.
- Reevaluate Your Retirement Date: If you plan to retire earlier or later than expected, you may need to switch to a different target date fund that more closely aligns with your new retirement plans.
Fidelity Target Date Funds are an excellent choice for retirement savers who want a simple, diversified, and low-maintenance way to invest for the long term.
Risks of Fidelity Target Date Funds
While Fidelity Target Date Funds offer convenience and diversification, there are some risks to be aware of:
- Market Risk: Like all investments, Target Date Funds are subject to market fluctuations. If the stock market performs poorly, the value of your fund can decline, especially in the earlier years when the fund has more stock exposure.
- Not Completely Risk-Free in Retirement: Even as you approach retirement, these funds still carry some risk, as the fund retains a portion of investments in equities. A complete shift to bonds may not always be ideal depending on inflation and interest rate changes.
- Target Date May Not Align Perfectly: The fund’s target date is just an estimate. Some individuals may retire earlier or later than expected, and the fund’s glide path may not be optimal for every investor’s unique situation.
Fidelity Target Date Funds are known for having relatively low fees, which can be a significant advantage for long-term investors.