Retirement planning is never easy, but some mutual funds, index funds and exchange-traded funds (ETFs) can ease that burden. A well-balanced retirement portfolio should include stocks and bonds and perhaps other assets depending on investors’ individual risk tolerance.
In retirement, investors still have several factors to consider, including risk. Conventional wisdom dictates retirement portfolio should start out at 60% equities and 40% fixed income, reducing equity exposure while ratcheting up bond investments as the investor ages. However, some retirees may want to or need to maintain higher exposure. Others may want to significantly increase fixed exposure to limit portfolio volatility.
Another important consideration is fund fees. Retirees are, well, retired. Even those who have part-time jobs or other sources of income beyond investments should ensure they are not being fleeced by high fund fees, which erode returns and income potential. Fortunately, retirement investors can find an array of favorably priced funds, many of which hail from well-known issuers.
Consider the following five funds for retirement planning over the rest of 2018.
Best Retirement Funds Fidelity Intermediate Term Bond Fund (FTHRX)
Expense ratio: 0.45%, or $45 on a $10,000 investment.
Minimum Investment: $2,500
The Fidelity Intermediate Term Bond Fund (MUTF:FTHRX) could be an ideal play for retirement planning in a new era of rising interest rates. The Federal Reserve boosted rates three times last year, has done so once already this year and is planning more such moves over the course of 2018. That could pressure longer-dated bonds, making shorter- and intermediate-term fare more attractive.
“Fidelity Intermediate Term Bond is a fund that has interest-rate risk below the peer group average,” according to Morningstar. “It has credit risk below the peer group average. It’s very mild-mannered. But if you’ve also got high-yield or some other riskier funds out in your portfolio, this is kind of a nice core anchor for you.”
FTHRX has a duration of 3.91 years and a 30-day SEC yield of 2.70%.
Best Retirement Funds: Vanguard Target Retirement 2025 Fund (VTTVX)
Expense ratio: 0.14%
Minimum Investment: $1,000
The Vanguard Target Retirement 2025 Fund (MUTF:VTTVX) requires a minimum investment of $1,000. This fund is suited for investors with about five to seven years to retirement because it expires in the year 2025.
“Investors in the funds should be able to tolerate the risks that come from the volatility of the stock and bond markets. The 2025 fund invests in four Vanguard index funds, holding approximately 65% of assets in stocks and 35% in bonds,” according to Vanguard.
The bulk of VTTVX’s equity holdings are domestic stocks with some international exposure. This retirement fund allocates 25.7% of its fixed income weight to U.S. bonds with another 11% devoted to international debt. As 2025 draws closer, VTTVX’s fixed income exposure will increase and its equity exposure will decline.
Best Retirement Funds: Vanguard High-Dividend Yield Fund (VHDYX)
Expense ratio: 0.15%
Minimum Investment: $3,000
The Vanguard High-Dividend Yield Fund (MUTF:VHDYX) carries a minimum investment of $3,000, but this retirement fund can help investors generate much-needed income. This Vanguard holds stocks that generally considered higher yielding, which can mean some added defense in times of market volatility but also the risk of leaving some upside on the table when markets are moving higher.
VHDYX holds nearly 400 stocks with a median market value of over $140 billion, so this retirement fund is mostly positioned in large- and mega-cap territory. This Vanguard fund devotes almost 17% of its weight to technology stocks, something of a surprise among traditional high dividend strategies. Three of the fund’s top 10 holdings, a group combining for 31.2% of its weight, are tech names.
Financial services, healthcare and industrial stocks combine for nearly 41% of VHDYX’s weight. With an annual fee of 0.15%, this Vanguard fund is cheaper than 85% of competing strategies.
Best Retirement Funds: FMI Large Cap Fund (FMIHX)
Source: 401(k) 2012 via Flickr
Expense ratio: 0.85%
Minimum Investment: $1,000
The FMI Large Cap Fund (MUTF:FMIHX) is a concentrated equity bet for retirement planning as this funds held just 27 stocks at the end of last year. The core principal with FMIHX is that the fund managers aim to buy good businesses at attractive valuations, one of the key tenets of the Warren Buffett philosophy.
“Some of the characteristics of good businesses may include strong recurring revenue and attractive returns-on-investment capital. A strong orientation to low absolute or relative valuation is key to the execution of the investment strategy,” according to the issuer.
While FMIHX’s second-largest sector weight is technology, this is not a FAANG-heavy growth fund. Rather, FMIHX can be seen as a value bet, which is important because the value factor works over the long-term.
Best Retirement Funds: iShares Edge MSCI Min Vol USA ETF (USMV)
Expense ratio: 0.15%
The iShares Edge MSCI Min Vol USA ETF (BATS:USMV) is the largest minimum volatility ETF in the U.S. and tracks the MSCI USA Minimum Volatility (USD) Index. Reducing volatility should be of added importance to retirement investors, and USMV is one of the most cost-effective avenues to enhancing a portfolio’s low volatility credentials.
USMV, which has nearly $14 billion in assets under management, holds 207 and this retirement fund is a departure from typical low volatility strategies, which often rely heavily on consumer staples and utilities stocks. Rather, USMV devotes about 37% of its combined weight to tech and healthcare names while rate-sensitive utilities names are just 7.33% of the portfolio. That is something to consider in a rising rates environment.
USMV’s “beta to the S&P 500 has been 0.67 over the past three years, which means anytime the S&P has moved 1%, it’s gone up 0.67%,” according to Morningstrar. “It’s had relatively muted drawdowns as well.”
USMV’s three-year standard deviation is 8.56%, below that of the S&P 500.
As of this writing, Todd Shriber did not own any of the aforementioned securities.