What it means
A life cycle fund follows a glide path, which is a schedule showing how the mix of shares, bonds and cash changes over time. Early in a career the fund holds mostly shares for growth, and as retirement nears it moves towards bonds and cash to protect savings.
The idea rests on the fact that young savers have decades to recover from market falls while older savers do not. A large loss at age 63 hurts far more than the same loss at 33.
Funds are usually named by year, for example a 2050 fund for someone planning to retire around that date. The manager changes the mix automatically, often once a year, and the investor simply keeps contributing.
One simple rule of thumb is to hold 110 minus your age as a percentage in shares, although each provider designs its own path. Some funds keep shifting after retirement, while others stop at a fixed mix.
Nuances include fees, which can be higher than a simple index fund, and the fact that two funds with the same year can hold very different amounts of risk. Because the mix depends only on age, it ignores the investor's other assets and personal circumstances.
Performance depends heavily on the underlying funds as well as the glide path. Some series use index funds with low fees, while others use actively managed funds that cost more.
Comparing the total annual fee, often stated as a percentage of assets, is one of the easiest ways to judge value.
In practice
Real-world examples.
Example
A 28-year-old designer joins a company retirement plan and is placed in a 2065 life cycle fund by default. She contributes $400 a month without having to choose shares or bonds herself. Over the next 30 years the fund quietly lowers her exposure to shares as 2065 approaches.
Example
A 58-year-old manager checks his 2030 fund and sees that most of it is already in bonds. He decides it is too cautious for his plans to work until 70 and moves part of it to a later-dated fund. He keeps the rest in the original fund so that part of his savings is already protected.
Example
A small business owner sets up a workplace plan for 15 staff and picks a life cycle series as the default. This reduces her paperwork because each employee is automatically placed in the fund matching their expected retirement year. Her staff receive an annual statement showing how the mix has shifted, which she finds easier to explain than individual fund choices.
Formula
Calculation
Share allocation = 110 - Age (as a % of the portfolio), as a simple rule of thumb
Suppose an investor aged 35 has $200,000. Share allocation = 110 - 35 = 75%, so shares = 200,000 x 0.75 = $150,000 and bonds = $50,000. At age 60 the portfolio has grown to $600,000 and the allocation is 110 - 60 = 50%, so shares = 600,000 x 0.50 = $300,000 and bonds = $300,000. The rule of thumb is only a starting point, but it shows the mechanism. Between 35 and 60 the share allocation falls by 25 percentage points, and the fund achieves that by directing new money and rebalancing, not by the investor choosing each trade.Case study
Seen in the real world.
Bluebird Logistics is an illustrative, fictional company with 120 employees. It adds a life cycle series as the default option in its retirement plan, because many staff never chose investments at all and sat in cash.
After two years the human resources team finds that average balances have grown faster and that older employees are less exposed to a sudden fall. A few staff complain that fees are higher than a basic index fund, so the company negotiates a lower fee tier. The invented example shows both the convenience and the cost trade-off.
Over the following decade, the plan also tracked how many employees left the default fund. Fewer than one in ten switched, which suggests that most people value the simplicity of a ready-made mix.
Watch out
Common mistakes.
- Assuming the target year is a guarantee. It is only the planned date for the glide path, and the fund can lose value.
- Choosing the fund by name alone. Funds from different providers with the same year can hold very different amounts of risk.
- Holding a life cycle fund alongside many other funds. Combined holdings can undo the intended mix.
Questions
People also ask.
What is the difference between a life cycle fund and a lifestyle fund?
A life cycle fund changes with age, whereas a lifestyle fund keeps a fixed mix based on risk appetite.
Do the funds stop changing at retirement?
It depends on the provider, as some keep shifting after retirement and others hold a fixed mix.
Can I switch to a different year?
Yes, most plans allow switches, and investors with a higher risk appetite may choose a later-dated fund.
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