Lifestyle funds or ETFs have been in the forefront in recent years. For some people they have definite value.
The concept behind retirement investing with lifestyle funds is that the fund manager does the work for you to allocate your money. The allocation is based on when you expect to retire.
The principles of the lifestyle funds are based on the age old concept of diversification and allocation of your investments according to your age. This philosophy basically revolves around the concept that when you are young you can take more risks with your money than when you are older.
There are a number of ways this allocation can work, but here are a few simple examples:
For 20 -35 year olds:
- US stocks – 60%
- Foreign stocks – 20%
- Bonds – 20%
For 40 – 50 year olds:
- US stocks – 50%
- Foreign stocks – 20%
- Bonds – 30%
For 50 – 65 year olds:
- US stocks – 40%
- Foreign stocks – 15%
- Bonds – 45%
For 66+ years of age:
- US stocks – 20%
- Foreign stocks – 10%
- Bonds – 70%
As you can see from the progression when the allocation changes the money manager puts your money into more stable and conservative choices. These choices are less risky. Even the choices of stocks become more stable, for example from stocks with high gain potential to stocks with some gain potential but ones that also issue dividends.
Lifestyle funds or etfs are offer by different brokers and families with the funds having names designating when they expire or your retire, for example
- Lifestyle 2020
- Lifestyle 2025
- Lifestyle 2030
Like any other stock or mutual fund choosing a lifestyle fund (ETF) requires a bit of research. Check out the performance for not just the last year but for a number of years. But check not just the fund for the year based on your projected retirement but also some of the earlier years or even later years. This will give you an idea of how the manager does in producing performance at different times.
And of course you want to compare a few different lifestyle families.
A different use of Lifestyle funds is to use them based on your own objectives, whether they be aggressive or conservative. This concept is based on the philosophy that is going to diversify your money in a manner that works with your risk level and concept of safe investing.
For example, if you want to be an aggressive investor, but don’t want to be watching the market all the time, you could invest in a Lifestyle fund based upon many years until retirement – i.e. 2050 – and every five years switch again to an ETF that is the most years away.
On the other hand if you want to play it super conservative you would pick a Lifestyle investment that is only five years away, something like 2015 or 2020.