Three-Fund IRA Portfolios for Fidelity Investors

Last week, I wrote about some Vanguard research highlighting that IRA investors often fund their accounts and leave the money in cash.

But this can’t just be a Vanguard problem—and kudos to the firm for discussing it. My guess is that most investing platforms see a similar phenomenon, where investors roll over assets from a company retirement plan or rush to fund an IRA before the deadline. Once they’ve handled that phase of the transaction, they don’t take the next steps to get the money invested, perhaps because they’re overwhelmed with choices and aren’t sure how to allocate the assets.

That’s where my model portfolios can help. They’re designed to provide guidance on what sane asset-allocation mixes look like for investors at various life stages. (Of course, a target-date fund can also be a solid choice that’s even more hands-off, and Fidelity fields some excellent ones.) I’ve created some minimalist portfolios composed of three Fidelity index funds in varying allocations for a variety of life stages. The in-retirement portfolios are all organized on the Bucket portfolio framework, while the portfolios for retirement savers are geared towards still-working people who have a long runway to retirement.

Note that these portfolios are intended for tax-sheltered accounts like IRAs. As a result, they are not constructed with an eye towards tax efficiency. I’ve developed similar Fidelity portfolios for taxable accounts; these portfolios are designed to minimize the drag of taxes on an ongoing basis.

Three-Fund Fidelity IRA Portfolios for Retirees

Geared towards retirees, these portfolios all employ Fidelity index funds and use a bucket structure, meaning that the retiree uses anticipated portfolio withdrawals to determine how much to hold in cash, bonds, and stocks. A retiree planning to spend 4% a year from an IRA, for example, might hold two years’ worth of those planned withdrawals in cash (8% of the total portfolio), another five to eight years’ worth of withdrawals in high-quality bonds (20% to 32%), and the remainder in stocks. Meanwhile, retirees who are holding Roth IRAs earmarked for heirs (that is, IRAs from which they don’t intend to spend actively) may well want to employ an even larger equity position.

Like my Vanguard three-fund portfolios, these portfolios all include a total US market index fund, a total international stock index fund, and a bond index fund. Each of the portfolios also includes a cash bucket to cover ongoing cash flow needs. In the interest of simplicity, they’re missing a few asset types I like to see in retiree portfolios, but they’ve got the basics covered.

Aggressive

Anticipated time horizon in retirement: 20–25 years

Anticipated annual portfolio withdrawal: 4%

Risk tolerance/capacity: High

Target stock/bond/cash mix: 60/32/8

Bucket 1

Bucket 2

• 32%: Fidelity US Bond Index FXNAX

Bucket 3

• 40%: Fidelity Total Market Index FSKAX
• 20%: Fidelity Total International Index FTIHX

Moderate

Anticipated time horizon in retirement: 15–25 years

Anticipated annual portfolio withdrawal: 5%

Risk tolerance/capacity: Moderate

Target stock/bond/cash mix: 50/40/10

Bucket 1

Bucket 2

• 40%: Fidelity US Bond Index

Bucket 3

• 35%: Fidelity Total Market Index
• 15%: Fidelity Total International Index

Conservative

Anticipated time horizon in retirement: Fewer than 15 years

Anticipated annual portfolio withdrawal: 6%

Risk tolerance/capacity: Low

Target stock/bond/cash mix: 40/48/12

Bucket 1

Bucket 2

• 48%: Fidelity US Bond Index

Bucket 3

• 28%: Fidelity Total Market Index
• 12%: Fidelity Total International Index

Three-Fund Retirement Fidelity IRA Portfolios for Retirement Savers

Geared towards people who are still working and saving for retirement, these portfolios vary in their amounts of stock exposure and, in turn, their risk levels. Unlike the above portfolios, they don’t include cash because the assumption is that the still-working investor isn’t actively spending from their assets yet. Such individuals should hold cash as an emergency buffer, but they’ll want to hold it outside an IRA to avoid the taxes and penalties that apply to early IRA withdrawals.

The Aggressive Portfolio is best suited to younger investors with many years until retirement, whereas the Conservative portfolio is geared towards still-working individuals who expect to retire within the next few years. The Moderate portfolio falls between the two. The allocations are loosely based on Morningstar’s Lifetime Allocation Indexes.

Investors should bear in mind their own risk tolerances as well as their proximity to retirement when selecting an allocation mix. Young investors who are risk-averse and haven’t yet lived through a major equity downdraft may prefer to use the Moderate portfolio. Meanwhile, older investors who know they can handle some volatility and will be able to rely on a pension for most of their living expenses could reasonably use the Moderate or even Aggressive portfolio, even if retirement is close at hand.

Aggressive

Anticipated time horizon to retirement: 35–40 years

Risk tolerance/capacity: High

Target stock/bond mix: 95/5

• 55%: Fidelity Total Market Index
• 40%: Fidelity Total International Index
• 5%: Fidelity US Bond Index

Moderate

Anticipated time horizon to retirement: 20–25 years

Risk tolerance/capacity: Moderate

Target stock/bond mix: 80/20

• 48%: Fidelity Total Market Index
• 32%: Fidelity Total International Index
• 20%: Fidelity US Bond Index

Conservative

Anticipated time horizon to retirement: 2–5 years

Risk tolerance/capacity: Low

Target stock/bond mix: 50/50

• 35%: Fidelity Total Market Index
• 15%: Fidelity Total International Index
• 50%: Fidelity US Bond Index