Saturday, April 12, 2008

Making my 2007 Roth IRA contribution

I just made my 2007 Roth IRA contribution yesterday, electronically using Fidelity. I was unable to make a full $5,000 ($4,000 if you are under 50) contribution since my income in 2007 was too high. Now the question is what to do with that cash. By default, it sits in the Fidelity Cash Reserves money market fund (FDRXX) which currently has a 2.83% 7-day yield.

My current top contender is to go with the Fidelity Freedom Fund 2025 (FFTWX), a so-called "life-cycle fund" (actually, a "life-cycle target-date fund") which will automatically rebalance its portfolio to less stock and more fixed income as it gets closer to that target retirement year of 2025. The main attraction of such a fund is that my account can run on auto-pilot literally for the rest of my life and is 100% in alignment with investing for retirement with a larger share of stocks now and declining as I get close to my target retirement year of 2025. Now, whether this fund actually is setup to work well for me is a debatable point, but in principle it sounds ideal. I have other retirement funds that I can be more aggressive with, but having a core in stable, semi-aggressive, auto-pilot mode, and in-sync with my retirement plans seems to make a lot of sense.

The downside is that I probably wish it was more aggressive. I could compensate for that by using a later target date, such as the Fidelity Freedom Fund 2035 (FFTHX).

I am sure that there are plenty of funds which will likely give a much better rate of return, but quite probably with the risk that I will need to watch them and then get out of them when they "peak" and start to fall out of favor. My view is that life cycle retirement funds are only going to increase in appeal as the population ages and people see their retirements less than 20 years away. I think that people in general really want their retirement planning to be on auto-pilot as much as possible and even doing an investment assessment once a year is more mental and emotional effort than they are interested in. Sure, the price is lower return, but the payoff is in piece of mind and sleeping soundly at night.

But, make no mistake, a life-cycle target-date fund more than a few years from its target date has a lot of stock and is susceptible to stock market gyrations. For example, on Friday when the Dow fell over 2%, the Fidelity Freedom Fund 2025 (FFTWX) fell by 1.3%, and is down -6.75% year-to-date, and down -2.00% over the past year. The key here is not that there might be fluctuations and periods of decline, but that you do not need to waste time second-guessing the markets and can for the most part ignore what goes on down on Wall Street.

There are a number of other investment companies offering a variety of life-cycle funds, but since I keep most of my assets at Fidelity, I will probably stick with them until I hear a compelling case otherwise.

If nothing else, investing in one of these Freedom life-cycle funds will give me something interesting to blog about that other people may be interested in.

I will probably go ahead and invest in the "2025" for my Fidelity Roth account unless I change my mind (or some reader can help to change it for me) over the next 36 hours. Tick... tick... tick...

-- Jack Krupansky

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