Mutual Funds
Funds That Grow With You
Is it possible that a single fund is all you need for your retirement savings?
By Manuel Schiffres, Executive Editor, Kiplinger's Personal Finance
June 2005
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Donli Cox will graduate in December from the University of Missouri-Kansas City with a degree in business administration. Eventually, she hopes to obtain a master's degree in finance. At that point, Cox, 28, will probably be comfortable assembling her own retirement portfolio. But she's not there yet, so she's relying on a one-stop mutual fund to get her to the promised land of retirement.
Cox has her IRA money in American Century My Retirement 2045. Geared toward investors who expect to retire around 2045, the fund is heavily invested in stocks today but will become increasingly conservative as time goes by. When 2045 rolls around, the bulk of the fund's assets will be in bonds and cash.
It's just the kind of fund Cox needs. "I like the diversification it provides -- you don't want to put all your eggs in one basket," she says. "And I know that the older you get, the less risk you want to take. Someday, if I feel confident that I know what I'm doing, I may build my own portfolio. But right now, it's just so much easier to have someone else take care of it."
In their quest to simplify investing for people who have neither the time nor the inclination to become experts, dozens of fund companies have introduced so-called life-cycle funds in recent years. Designed to substitute for do-it-yourself diversification, these funds come in two varieties:
Target-retirement funds. The fund sponsor creates a series of funds with staggered target dates -- say, 2010, 2015 and so on until 2045. Instead of investing in individual stocks and bonds, each fund invests in other stock and bond funds offered by the sponsor. The investor selects the fund closest to his or her year of retirement, and the fund does the rest -- gradually reducing its allocation to stocks and shifting the money to bonds and cash as time goes on. Someone shooting to retire in 2015 would pick a fund that already has a moderate allotment of stocks and see that allocation gradually decline over the next ten years.
Lifestyle funds. These are usually "funds of funds," too, with different stock/bond/cash allocations based on how much risk you�re comfortable with. A lifestyle series will include funds whose names include such descriptions as aggressive, moderate and conservative, plus assorted variations. With these funds, it's up to the investor to decide the level of risk, then to shift from fund to fund as circumstances dictate. For retirement investing, you might choose an aggressive fund when you're 40 years from retirement, shift to a moderate-risk fund 20 years later and shift to a conservative fund ten years before retirement.
Life-cycle funds are one of the hottest segments of the mutual fund business. According to Lipper, a fund research service, assets in the funds doubled, to $140 billion, between the end of 2002 and the end of 2004.
Fueling the growth of target-retirement funds in particular is their growing popularity in 401(k) and other employer-sponsored retirement plans. You can also buy them for your IRA. "Target funds instill confidence in people who would not otherwise participate in their 401(k) plans because it's too darn complicated," says financial planner Barry Glassman of Cassaday & Co., an investment firm in McLean, Va. "It gives them confidence by allowing them to one-stop shop."