A Lifecycle Fund Can Simplify Your Retirement Investing

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Couple reviewing papers with their advisorIf you don't have hours to spend choosing and maintaining the investment mix in your retirement account, then a lifecycle fund, sometimes called a target-date fund, may be a good option for you.

What is a lifecycle fund?

A lifecycle fund divides your savings among different asset classes, and then adjusts your holdings as you age. Most lifecycle funds invest their money in other mutual funds, known as a “fund of funds” strategy.

  • When you are younger, the fund will be invested more heavily in mutual funds that own stocks, which are more risky but offer the greatest opportunity for asset growth.

  • Over time, the mix of investments typically shifts to become more conservative as you move closer to retirement. So the fund will eventually hold an increasing share of fixed-income mutual funds, which are generally less volatile than stocks.

Each lifecycle fund is designed for investors who plan to retire in, or close to, the year identified in the fund's name (the "target year"). So, for example, if you're 35 today and expect to retire in about 30 years, or in 2044, you might look for a fund with 2045 in its name. Because of their focus on a specific target, lifecycle funds are sometimes also known as target-date funds.

Why choose a lifecycle fund?

Why invest in a lifecycle fund versus choosing your own investments? With a lifecycle fund you turn over the often complex task of managing your assets over to professional investment managers who make ongoing asset allocation decisions for the fund.

As the fund progresses toward its target year, the managers gradually steer the fund's asset allocation away from equities and toward more conservative fixed-income and cash investments. One of the main advantages of lifecycle funds is that your retirement funds will be well diversified without your having to choose a number of different investments or funds on your own.

Since you’re invested in a complete investment portfolio in a single fund, it can lessen the urge to buy and sell assets when markets turn volatile. Buying and selling in response to market highs and lows can lower your returns over time.

How to choose a lifecycle fund

An important feature of any lifecycle fund is the fund's “glidepath design,” or how the fund moves over time toward a more conservative, less risky asset allocation as you near retirement. A fund's glidepath design should factor in the potential for returns as well as possible sources of investment risk. The design should also take into account the increasing life expectancy of the U.S. population in an effort to balance market risk with the risk of outliving your money. You generally want to hold some assets in equities even as you near retirement and after you stop working, so that a portion of your nest egg can continue to grow, helping to prevent you from outliving your savings. A sample glidepath design is shown below.

Other things to consider when choosing a lifecycle fund include the expenses the fund charges, which can vary from one fund company to another, and whether the fund invests in a broad range of asset classes, such as small-cap stocks, emerging markets and high-yield bonds.

Sample graphic for a Lifecycle Fund

Different lifecycle funds can follow different asset management approaches. Some invest all their assets into actively managed mutual funds, others invest in index mutual funds, and some use a mix of index and active funds.

In an actively managed mutual fund, a professional fund manager uses analytical research and his or her own experience and judgment to build a portfolio of individual stocks or bonds. Actively managed funds may provide returns above the performance of the overall stock or bond markets, although they may also underperform.

In an index or passive strategy, the manager sets out to track the performance of a particular benchmark, such as the Standard & Poor’s 500 index. Index fund expenses are generally lower than actively managed funds or annuities. While index funds are designed to track the performance of the indexes they follow, investors generally won't meet or exceed the index performance after fees are deducted.

How to invest in a lifecycle fund:

  • Before investing in a particular lifecycle fund, be sure you're comfortable with its glidepath design, which you can learn about in the fund's prospectus or on its website.

  • Bear in mind that a lifecycle fund, like any mutual fund, is subject to asset allocation risk and general market risk. A lifecycle fund's principal value is not guaranteed at any time, including in the target year.

Consider seeking guidance from a professional financial advisor. Choosing which lifecycle fund is best for you can be a challenge. A trusted professional financial advisor can offer valuable guidance.

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