What Is a Life-Cycle Fund?

Asset-allocation funds, known as “life-cycle funds,” automatically reduce risk as the target retirement date draws nearer by adjusting each asset class’s share. This typically translates to an increase in the proportion of bonds and other fixed-income investments. Other names for life-cycle funds are “age-based funds” and “target-date retirement funds.”

A young investor setting aside money for retirement usually selects a life-cycle fund with a projected maturity date of thirty to forty years. On the other hand, an investor who is getting close to retirement may be considering a working retirement with a modest company income. An investor might choose a life-cycle fund with a goal date of fifteen years in the future. Putting up with increased volatility can help extend retirement savings over the 20+ years of old life that most people can anticipate.

How a Life-Cycle Fund Works

Life-cycle funds are intended for usage by investors with particular objectives that call for money at specific intervals. Investments for retirement are typically made with these funds. On the other hand, investors can utilize them at any point when they want funds. Every life-cycle fund has a target date associated with it, which helps to define its time horizon.

An illustration will make the operation of a life-cycle fund more transparent. Assume that in 2020, you invest in a life-cycle fund with a 2050 projected retirement date. The fund will start aggressively. The fund may include 20% bonds and 80% stocks in 2020. The portfolio will have fewer equities and more bonds annually. You should be halfway to your retirement date by 2035. in 2035, the fund would comprise 40% bonds and 60% stocks. Ultimately, by the intended retirement date of 2050, the fund would have reached 40% equities and 60% bonds.

Benefits

Life-cycle funds provide convenience for investors with a definite demand for capital at a given date. With just one fund, investors in life-cycle funds can effortlessly automate their investing processes. Life-cycle funds’ fixed asset allocations guarantee to provide investors with an appropriate, well-balanced portfolio each year. A life-cycle fund can suit investors who want to approach retirement with a reasonably passive strategy. Another advantage that the majority of life-cycle funds share is preset glide paths. Investors who choose a predefined path benefit from increased transparency, which boosts their trust in the fund. The glide path of a life-cycle fund allows for a gradual reduction in risk over time by redistributing asset allocations toward low-risk securities. Additionally, investors should anticipate that a life-cycle fund will be managed until the intended retirement date.

 Remarks about Life-Cycle Funds

Some criticize life-cycle funds’ age-based strategy, saying it needs to be more effective. Specifically, the bull market’s age can matter more than the investor’s. Benjamin Graham, the renowned investor, advised basing stock and bond selections on market values rather than age. Nobel Prize-winning economist Robert Shiller promoted using the P/E 10 ratio as a gauge for stock market value, building on Graham’s research.

Although it’s not always the case, life-cycle funds are predicated on the notion that younger investors can tolerate more significant risk. Younger employees nearly always have less experience and save less money. Younger workers are, therefore, particularly susceptible to unemployment during recessions. Young investors who take on a lot of risk may have to sell their investments at the worst possible moment.

Additionally, investors may want a more proactive strategy. Such investors should consult a financial professional or use alternative funding sources to reach their investing objectives.

An Actual Life-Cycle Fund Example

A life-cycle fund is the Vanguard Target Retirement 2065 Trust. Vanguard’s life-cycle option for 2065, the Vanguard Target Retirement 2065 Trusts, was introduced in July 2017.1. The fund illustrates how life-cycle funds transition risk management allocations.

For the first 20 years, the Vanguard Target Retirement 2065 asset allocation stays constant at roughly 90% in stocks and 10% in bonds. The allocation steadily shifts toward bonds over the next 25 years, which will get us closer to the target date. Approximately 50% of the assets will be in stocks, 40% in bonds, and 10% in short-term TIPS at the target date. Seven years after the target date, we will see a steady increase in the allocation to bonds and short-term TIPS. The allocation is roughly 20% short-term TIPS, 50% bonds, and 30% stocks.

Conclusion

• Life-cycle funds are asset-allocation funds that automatically alter the proportion of each asset class to reduce risk as the targeted retirement date approaches.
• Life-cycle funds are intended for investors with defined goals that require capital at specific times.
• A life-cycle fund may be acceptable for individuals who want to take a relatively passive approach to retirement.
• A legendary investor, Benjamin Graham, advised altering stock and bond investments depending on market prices rather than your age.