Even though the investment industry might have you think otherwise, investing for your retirement does not have to be difficult. Still, many people turn to investment advisors for help.
Unfortunately, because of how advisors are compensated, there may be conflict between what is best for them and what is best for their clients.
Life-cycle funds offer a viable solution. Here we'll examine what these funds are, compare different ones and finally look at some issues to consider before using these funds for your retirement portfolio.
What Are Life-Cycle Funds?
Life-cycle funds are the closest thing the industry has to a maintenance-free retirement fund.
Life-cycle funds, also referred to as "age-based funds" or "target-date funds", are a special breed of the balanced fund. They are a type of fund of funds structured between equity and fixed income.
But the distinguishing feature of the life-cycle fund is that its overall asset allocation automatically adjusts to become more conservative as your expected retirement date approaches. While life-cycle funds have been around for a while, they have been gaining popularity.
Example of asset allocation (Vanguard)
Target Equity Bond
2025 59% 41%
2015 51% 49%
As the fund approaches the target maturity date, a higher proportion is invested in bonds.
Rule of thumb: The proportion invested in bonds should be equal to your age!