Retirement Step by Step
Life-cycle funds put your investment portfolio on autopilot, with bold strategies giving way to safer bets as you get older
So make sure you're comfortable with the asset allocation strategy of the fund you pick.
Don't pick a fund solely based on your projected retirement date. Target retirement funds give you a choice based on dates. If you're 15 years away from retiring, you might choose a 2020 fund. If you're 35 years off, you might decide on a 2040 fund.
These dates are usually a hypothetical retirement at age 65. But you may choose to work longer, which means you might be better off in a fund that's dated to when you turn 70, not 65.
And even if you do expect to retire at 65, you may not need to tap the bulk of your assets until much later. If you have a traditional pension from your employer, that plus Social Security might cover basic expenses until you're 70 or older.
Don't feel obligated to stick with any single target date fund for your entire life. If you're 40 and begin investing in a 2030 fund that's too conservative for you, there are no rules preventing you from shifting to a more aggressive 2035 or 2040 fund later on. Or try out a target fund when you're young, and when you're more experienced as an investor and have more money saved, leave the fund and seek out individualized professional advice.
Don't be afraid to put most of your money into a target fund. Life-cycle funds invest in a collection of other mutual funds and are broadly diversified. The Fidelity Freedom funds, for example, were "designed as a single-fund solution," says John Sweeney, senior vice president with Fidelity Personal Investments.
Don't tinker too much. Keep your core holdings in a life-cycle fund because it will cover the basic asset classes. Then, you may want to put a small portion of your money in alternative investments. Many target date funds don't have much stake, for instance, in real-estate investment trusts, gold, or commodities.
Always keep fees in mind. Most life-cycle funds are mutual funds that invest in underlying mutual funds--funds of funds, in other words. So, two layers of investment management fees apply. Consider sticking with a life-cycle fund that charges less than 1.5 percent in total annual expenses. Some come much cheaper. Vanguard's offerings, for instance, have a total expense ratio of just 0.21 percent to 0.22 percent.
Life-cycle funds are an appealing solution that can make anyone a set-it-and-forget-it investor who gets reasonable returns. But they aren't a magic bullet. You still have to save in a disciplined way to reach your retirement goals. And for that, you're on your own.
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