What Are Lifecycle Funds? How Does It Work? Pros & Cons

Lifecycle Funds

Choosing the right retirement investment fund is critical for a worker. As their retirement draws closer and closer, they tend to be more curious and careful about having a better investment plan. 

A lifecycle fund is one of many investments workers like to maintain for retirement. Indeed, some investment plans have compounding benefits and an annuity with an insured post-retirement income. But lifecycle funds provide one of the safest options when it comes to saving for retirement. 

The best thing about a life cycle fund is that it can adjust itself as the investor moves toward their retirement. It adjusts risks and grows rewards slowly. 

How Does Lifecycle Fund Work?

Life cycle fund gradually changes the allocations of its assets according to the asset’s glide path. In simple words, this investment plan automatically adjusts the investment based on the investor’s risk tolerance as they near their retirement age. 

This investment vehicle reduces risk employees’s risk by preserving capital on their behalf. So, if the investor has to leave the workforce at a certain age, a Lifecycle fund can definitely help. 

The approach of a life cycle fund is to use the long-term life cycle of an investor’s fund. This is one of the long-term investment plans that include a mixture of different investment choices like mortgages, stocks, and different types of securities. 

The balanced distribution of the funds across different investment choices ensures investors’ security and provides a return. But as the fund nears the investors’ goal date, the fund automatically starts adjusting risks to ensure a stable retirement fund. 

If you are interested in this type of investment vehicle for investment, you will find options through taxable brokerage accounts. Employer retirement programs like 401k can also provide a lifecycle fund to interested employees. 

How Does A Lifecycle Fund Work?

How Does A Lifecycle Fund Work

Lifecycle funds became popular through a popular account called Thrift Savings Plan (TSP). Initially, it drew the attention of the federal government employees of the US and slowly made its way into private retirement plans. The TSP funds are very common when compared with the ones provided by private asset managers such as T. Rowe Price and Blackrock.

The lifecycle fund works by adjusting itself according to the investor’s risk appetite. A young working bachelor has a more potent risk appetite compared to that of a seasoned employee nearing retirement.

A more beneficial retirement plan would require you to adhere to the 100-year formula for asset allocation. What’s that? Here is a clear explanation –

If you are of the age of 25, then 75% of the total assets in your portfolio should be invested in stocks for compounding. But, if you are aged 55 or older, then your risk appetite should be strong enough to hold 45% of your fund in stocks.

Although this calculated retirement investment through lifecycle funds looks simple upfront, it lacks real scientific reasoning to back up its efficacy. However, it would be wise to consider other aspects than just one’s age to make the investment beneficial. 

Lifecycle Funds: Pros & Cons

Lifecycle funds also have their pros and cons when it comes to being an effective retirement investment plan. 

Pros Of Lifecycle Funds: What Are The Advantages?

Here are some advantages of investing in lifecycle funds –

  • Lifecycle funds are great for workers with a clear focus or goal on a return goal at a particular time. Investors with a clear outline about when they want to receive their retirement funds can opt for lifecycle funds. 
  • Some investors want to make their investments a passive effort and put them on autopilot. Such investors will benefit from the simplicity of the lifecycle funds. One can make their retirement investment plan automated through this investment option. 
  • Each year, the investors have a diversified portfolio through fixed asset allocation. 
  • As said before, a lifecycle fund allows investors to take a passive stance in their investments. 
  • This investment plan provides a predefined course. Thanks to that, investors have an increased amount of faith thanks to the increased clarity. 
  • Lifecycle funds investment takes the investor’s fund towards more of a low-risk investment plan as the investor nears retirement. 
  • Also, there are professional fund managers who manage the fund for the investors. 
  • The fund provides investors with an all-in-one portfolio. 

Cons Of Lifecycle Funds: What Are The Disadvantages?

Here are some of the disadvantages of having a lifecycle fund for retirement investment –

  • One of the negative sides of lifecycle funds is having high fees. Most of the funds can charge investors a high fee. 
  • The lifecycle investment plan usually accommodates an average investor with a specific retirement target year. So, if investors have different unique financial scenarios in mind, they will not comply with that. 
  • This retirement investment plan does provide you with a planned retirement target. But there is no guarantee as to the amount the lifecycle fund produces. So, possibly, you may have to supplement it with other different retirement plans.

Should You Get A Lifecycle Fund?

The answer is – “it depends.”

Here is a clear answer – if you want to set up a retirement plan and forget, then this is one of the best options. You can leave this investment fund to autopilot mode and live your life. But, if you are going to opt for it, think about your different shortcomings and crises. You should also think of your capability to defend against those with the plan on autopilot.

You should opt for this investment plan if you want more of a risk-averse retirement investment. But, comparatively, index funds charge lesser fees. You must consider the fees charged and balance them against the benefits of lifecycle funds. 

Also, since this investment option balances out according to your risk tolerance, this can be a convenient decision on your part. So, it would be wise to check the fund prospectus before opting for it. Ensure that the lifecycle funds comply with your retirement strategy. 

Firms That Offer Lifecycle Investment

  • American Century Investments
  • Charles Schwab
  • Invesco
  • John Hancock
  • BlackRock
  • MassMutual
  • Mutual of America
  • Capital Group (American Funds)
  • Dimensional Fund Advisors
  • Fidelity Investments
  • Franklin Templeton
  • Nationwide
  • Nuveen (TIAA)
  • J.P. Morgan Asset Management
  • Principal
  • Prudential Financial
  • Putnam Investments
  • State Street
  • Transamerica
  • T. Rowe Price
  • USAA
  • Vanguard
  • Voya

Final Words

If you are thinking of considering lifecycle funds, please consider the pros and cons of the same before choosing it from any of the firms above. Also, evaluate your own retirement strategy and go through the prospectus thoroughly. 

Did you find this article helpful? Please let us know your feedback through the comment box below. Thank you for reading. 

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