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What is a Lifecycle Fund? The Great Retirement Simplifier

Everywhere you look, you probably have people telling you that you need to start planning for retirement.

Your parents, your friends, even TV ads – all of them stressing the importance of building a stable financial future for yourself.

But how can you possibly add managing your retirement investments to the list of responsibilities you’re already juggling on a daily basis?

Allow me to introduce you to your new best friend: the lifecycle fund.

What is a Lifecycle Fund?

A lifecycle fund, also known as a target date fund, is one of the many options available for anyone seeking to start planning ahead for their retirement.

As its name implies, a lifecycle fund manages investments over a long term in order to generate a sum of money to be used at a specific time.

The goal of most lifecycle funds is generating a generous amount of wealth for a person’s retirement.

Young investors creating their lifecycle fund will likely set the target date for the fund about 30 to 40 years in the future. This is known as the investment horizon.

So, if you’re kickstarting your lifecycle fund in 2021, you would probably allow the fund to automatically manage your assets until about 2050-2060.

Lifecycle funds are designed to be an easier, more passive way to save for your retirement.

The fund itself – typically a mutual fund or index fund – is divided among certain assets, with the shares of each asset adjusting over time. The idea is that when you’re younger, you should be able to take on more risks with your investments, meaning that early on in the life of your fund, riskier assets will be prioritized over low-risk ones.

As the years progress, these asset allocations will slowly flip-flop until eventually, upon retirement, the lower risk securities will have the majority shares over the higher risk ones.

Let’s check out an example to help illustrate how lifecycle funds shift over time.

The year is 2021, and you’ve just decided to invest in your very own lifecycle fund. Cheers!

In its early years, your fund will be prone to taking on more market risk, with 80% of it belonging to common stocks and 20% to bonds.

As time goes on, the percentage held will slowly tip in favor of the low-risk assets.

In 2035, the amount of stocks may have reduced to 60% with the bonds increasing to 40%.

By the time you retire in 2051, the lifecycle fund will have automatically adjusted to prioritize the low-risk assets, showcasing 40% stocks and 60% bonds.

Benefits of Using a Lifecycle Fund

Probably the biggest benefit of relying on a lifecycle fund to save for your retirement is that you can essentially “set it and forget it.”

This type of fund is designed to be passive and requires no management on your part whatsoever once it has been set in motion.

For anyone who feels stressed about managing their retirement funds or simply doesn’t have the time to worry about rebalancing their portfolio according to changes in the market, lifecycle funds are a great investment strategy that will put you ahead for the future with little to no hassle on your end.

Lifecycle funds are also helpful for protecting against poor decision-making.

Rebalancing your stocks and bonds can be a tricky business with many investors seeing poor returns from consistently buying too high and selling too low.

Though it seems counterintuitive, having a portfolio that is automatically rebalanced for you may result in smaller, but more consistent, gains than managing the portfolio yourself, especially for young investors who may be new to the stock market and retirement planning.

A lifecycle fund can be of great help to those seeking to plan for their retirement without constantly stressing over the management of a huge number of investments. It keeps your retirement portfolio in one easy, accessible fund that requires little to no attention from you whatsoever.

And, unlike traditional mutual funds, lifecycle funds are made up entirely of several underlying funds instead of individual securities.

While that is generally a more expensive option due to high expense ratio fees, you may deem it a worthy price to pay for a diversified portfolio and peace of mind about the state of your financial future. 

Lifecycle funds are a hands off way to invest for retirement, but if you are someone who prefers more control and better returns, check out our Infinite Income $80k a year (tax-free!) case study.


When Can I Start Withdrawing From a Lifecycle Fund?

The same age as any retirement account which is typically 59 1/2.

Is a Life Cycle Fund the Same As Target Date Funds?

Yep, they’re also known as dynamic-risk funds and age-based funds.

Are Lifecycle Funds Available in My 401(k) or Thrift Savings Plan?

Typically, yes. Your employer chooses the investments that are available to you in their plan and these funds are definitely gaining popularity.

What is the Expected Return of a Lifecycle Fund?

The returns will vary based on the asset classes you’re invested in. Early on it will get an average stock market return which is about 9% and once you hit retirement age, the return will be much lower due to the lower risk in the fund.

How is the Retirement Date Chosen for a Lifecycle Fund?

You choose it based on your life expectancy and when you want to retire. The longer the time horizon, the longer the money will last in retirement.

If I Quit My Job Can I Rollover My Life Cycle Fund?

If you open a rollover account with the same company that manages your employer sponsored account, yes.

Can I Have Other Investments In Addition to My Lifecycle Fund?

Of course! If you want to invest outside your employer’s plan in an IRA that you manage, you can invest in individual stocks in addition to mutual funds and index funds.

What is the Difference Between Lifecycle Funds and an Asset Allocation Fund?

An Asset Allocation Fund is conceptually the same as a lifecycle fund, the asset classes are fixed and don’t adjust as you get closer to retirement.

What Are the Best Life Cycle Funds?

To us, the best life cycle funds have the lowest fees. So, take a look at Vanguard’s funds:

Vanguard Target Retirement 2030 Fund (VTHRX)

This has an expense ratio of 0.14% and has returned 38.84% in the last three years.

Vanguard Target Retirement 2040 Fund (VFORX)

This has an expense ratio of 0.14% and has returned 43.82% in the last three years.

Vanguard Target Retirement 2050 Fund (VFIFX)

This has an expense ratio of 0.15% and has returned 46.87% in the last three years.

what is a lifecycle fund

Of course, the S&P 500 has beaten all three of them so you may be better off investing in a good ol’ S&P 500 index fund or investing the Infinite Income way since we’ve beaten all four investing in individual companies as opposed to funds.

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