Lifestyle funds or ETFs offer advantages for many people, but they also can have unwanted repercussions or even leave you short of money in your retirement.
The concept of letting a manger handle your retirement account and allocate your investments based on your age sounds like a terrific idea… kind of like a one-stop, one-item market that fits all your needs. But does it?
The concept behind Lifestyle funds is simple: diversify your money into different stocks so your risk is spread out and then allocate it further based upon growth, stability and income producing stocks or bonds.
In this manner a young person would see his money going primarily into stocks or ETFs with substantial growth potential and a minor amount into income producing bonds.
A middle age investor investing in a Lifestyle fund would have his money spread out between growth, dividend producing stocks and bonds on an almost equal level.
A retiree would have her money primarily in bonds or other very secure stocks with high dividends levels so her balance remains stable while producing some, not a lot, but some income that at least comes close to or matches inflation. Of course, the actual balance of this account will now diminish as money is withdrawn to fund his or her life.
The danger with a lifestyle fund, in my opinion, is that you can actually end up short of money in retirement. Perhaps not at first, but as time goes by the Lifestyle ETF or fund is not growing, it is diminishing as you withdraw money while earning, hopefully an amount equal to inflation. But as we tend to live longer and longer, into our 80′s and 90′s, perhaps over a 100, a Lifestyle account that stopped growing, stopped holding growth stocks or ETFs when you first hit retirement age may run out of cash before we die.
Years ago, life expectancy after retirement was only 10 maybe 15 years, now we are seeing a retirement life that is approaching almost as many years as our “working life” span.
In order to be sure you have enough funds to support you in retirement an investment strategy needs to remain fairly aggressive for many, many years after you retire.
Obviously there are a number of ways to grow your retirement account and to keep it growing and viable throughout your life:
- Use investment software to manage your account, even Lifestyle funds
- Use Lifestyle Funds or ETFs
- Retain an Investment Advisor
Using Investment software and self-directing your retirement account for safe profitable investing is something everyone is capable of doing as long as you have the desire.
Using Lifestyle Funds or ETFs can be the answer as long as you realize that you may have to pick funds that expire further out in years than when you plan to retire so your money continues to grow during your retirement years.
The other pitfall of locking into a Lifestyle Fund is that when the market declines the allocation and diversification may not protect you from major losses as the fund is ‘locked into its allocation’. In other words these funds rarely incorporate a Market Exit signal for when the market dives. This type of feature is something a good investment software program offers.
The choice of using Lifestyle Funds or ETFs is tempting as long as you understand the drawbacks. Monitoring them with an investment software program or a brokers evaluation system to compare one against another and against the market trends can help make these a viable choice for those with limited time to manage their future.