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Life cycle retirement accounts are not new, but they are gaining popularity because they offer a low-maintenance mutual fund investment vehicle that adapts to your needs over time.
Say you buy shares in a life cycle fund at age 25. Since you are still 40 years away from retirement, you should be heavier in riskier, higher growth vehicles like small-cap stocks, and lighter in instruments like municipal bonds, which offer more security but lower returns. So, your life cycle mutual fund may consist of 70% stocks and 30% bonds. Among those stocks, you may have half in small cap growth stocks and half in blue chips.
By the time you hit 45, you'll still have 20 years to retirement. Using specially designed financial planning software, the fund manager will have shifted your mix to perhaps 60% blue chips, 35% bonds and 10% money market. As you approach retirement age, your mix may shift to an income generating profile of 20% blue chip stocks, 20% money market and 60% government bonds.
Life cycle retirement accounts adapt to your changing risk profile, periodically changing your investment mix to fit your needs. However, they really only work as intended when you invest 100% of your savings in a single life cycle fund whose target retirement date is the correct one for you.
|Sheri Ann Richerson|