If you don’t have hours to spend choosing and maintaining an asset allocation for your retirement account, consider a lifecycle fund, sometimes called a target-date fund. A lifecycle fund is an all-in-one investment option that offers you, in a single fund, a diversified portfolio with an asset allocation geared to the year in which you expect to retire.
A lifecycle fund’s asset allocation reflects what its investment managers have determined is the optimal risk and return profile for a given time horizon ending with the fund’s target year. You simply choose a fund with a target year that lines up with when you expect to retire. The target year is identified in the fund’s name, making it easier for you to find a fund that’s appropriate for you. For example, if you’re 35 today and expect to retire in about 30 years, or in 2045, you might look for a fund with 2045 in its name.
Most lifecycle funds invest in other mutual funds, which is known as a “fund of funds” strategy. When you’re younger, your assets, along with all other assets of the fund, are invested more heavily in mutual funds that own equities, which are riskier than other asset classes but offer a greater opportunity for long-term growth of your investment. Over time, as you move closer to retirement, the fund’s investment mix becomes more conservative, with a larger share of assets going into fixed-income mutual funds, which are generally less risky than equity funds. This planned, gradual shift toward lower-risk investments is known as the fund’s “glide path.” You don’t have to worry about when or how to rebalance your retirement portfolio, because the fund does the work for you.
A lifecycle fund provides diversification and rebalancing in a single fund. If you invest in other funds in addition to a lifecycle fund, be aware that you could affect the asset allocation developed specifically for your retirement target date.
How to choose a lifecycle fund
Select a fund with a target year and glide path design that you’re comfortable with, given your investment objectives. You can learn about a fund’s glide path design in the prospectus for the fund or on our website. Also learn about expenses the fund charges.
Bear in mind that like any mutual fund, a lifecycle fund is subject to risk. The value of your principal, or starting investment, is not guaranteed at any time – not even in the target year.