Trailblazer News

Lifecycle Investing

Posted on July 23, 2012

If you're looking for a way to simplify the investment process and make it easy to save for retirement, consider lifecycle funds. They're designed for people who don't want to actively manage their investments or don't feel equipped to do so.

Lifecycle funds are actually "funds of funds" wrapping underlying mutual funds together in a package designed to meet specific goals. These goals may be risk based, defined as conservative, moderate, or aggressive. Or they may be age based, as in target date funds pegged to the year in which you expect to retire. Target date funds typically hold more equities in the earlier years, automatically shifting to more conservative fixed income investments as retirement nears.

A lifecycle fund may be a good choice if you want the convenience of one-stop shopping and if you want optimum diversification and professional management within a single investment. It may not be a good choice, though, if you follow the markets and want to customize your investments.

If you decide that a lifecycle fund is right for you, and your employer's plan offers just one, the choice is easy. If you have a choice of funds, or are considering investing outside of your retirement plan, you should ask some questions:

  • What is the asset mix? With a target date fund, ignore the label and compare the asset allocation for each fund under consideration.
  • How will the asset mix change over time? Remember, given today's life expectancies, you still want equities as you reach retirement age.
  • What is your risk tolerance? Are you willing to accept some risk by investing more heavily in equities, in the interest of potential rewards?
  • What is the fee structure? Fees vary considerably. Don't assume that higher fees lead to higher returns.

Remember: Lifecycle funds are conceived as an investor's entire portfolio. Investing outside the lifecycle fund could undermine the allocation, and you could wind up with overlap or an inappropriate asset allocation. To get around this trap, either mirror the investments in the lifecycle fund or choose entirely different vehicles.

Better yet, when you are ready to invest outside of a tax-sheltered retirement plan, consult with the professionals at Pioneer Federal Credit Union, or with a financial adviser about which investments belong in a taxable account.

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