Retirement Planning in Scottsdale – Understanding Life Cycle Funds

Should your retirement planning in Scottsdale include life cycle funds? At first glance, these funds offer a simple way to invest for retirement. But do they make sense for you?

Life cycle funds are also called “age-based funds” or “target-based funds.” They represent a special category of balanced mutual funds that are automatically adjusted during the fund’s time horizon. Put another way, investors select a fund, put their money into it and forget about it until they retire. The simplicity is the biggest appeal.

Two types of life cycle funds exist today: target-date and target-risk. A target-date fund uses an asset allocation formula based on a future retirement year. If you are 20 years from retirement, you would select a “2036” life cycle fund. As you get closer to the target date, the fund adjusts its asset allocation to be more conservative.

Target-risk funds are based on risk tolerance. They are separated into three risk groups, including conservative, aggressive and moderate. If your risk profile changes at any time, you can switch funds.

With a concept so straight forward, why wouldn’t every investor want to use life cycle funds in their retirement planning in Scottsdale? Some of the challenges of life cycle funds include:

  • Disparity among different holdings – Not all funds contain the same investments. Although all life cycle funds will involve both equity and fixed income investments, the proportion and allocation of these investments can vary drastically from one fund to another.

Investors differ dramatically in their goals and financial situations. One investor with limited funds may only want to invest in bonds and other fixed-income securities. Another investor may want to focus on growth and therefore require a higher equity component. One life cycle fund cannot possibly meet the needs of both investors.

  • Fund expenses – A life cycle fund is a portfolio of sorts that contains other funds. Each of these funds has its own expenses that can add up quickly. When evaluating life cycle funds, you must understand how each fund calculates fees.
  • Putting all your eggs in one basket – The underlying funds in a life cycle portfolio fund are typically offered by the same company. If you select a Vanguard life cycle portfolio, that fund will likely contain Vanguard funds. Same goes for Fidelity. Although these are strong institutions, you nonetheless will be trusting your retirement assets to a single entity.
  • Lack of flexibility in reaching your goals – The investments contained in life cycle funds typically get more conservative the closer you get to your target retirement date. However, if you are not on track to achieve your goal, do you want to become more conservative with your investments? A conservative asset allocation may not deliver the necessary returns to keep your retirement on track.

A financial advisor can help you determine the right proportion and allocation of your retirement assets. He or she can also adjust investments based on your life situation or external market factors. You will not be locked into one investment fund throughout your entire retirement plan. A professional retirement planner in Scottsdale will help ensure you are putting the right amount of money into your retirement investments, the investments are structured in the most appropriate way to achieve your goals and your plan is adjusted as needed based on current criteria.

WealthTrust Arizona provides sound strategic recommendations to help clients reach their retirement planning goals. Whether retirement is a long way off or just around the corner, we work to preserve and grow your wealth so you don’t outlive your money. We develop a plan that considers your current assets, tax planning and risk management.

To learn more about retirement planning in Scottsdale, call for a free consultation at (480) 483-7300. You can also visit our website for more information.