From the e-mail readers send to us, it is apparent some readers of FedSmith.com really don’t like making investment decisions.
For these readers, deciding how to split stock investments between the C, S and I funds is right up there with deciding whether you prefer to be buried in a pine box or cremation when the time comes. Some readers decide “not to decide” which, in reality, is a decision not to be able to retire because they don’t invest at all in the TSP. Others throw up their hands and put all their investments into the G fund so they can sleep better at night.
If you are a federal employee, especially if you are a federal employee who doesn’t like to decide how to invest your TSP retirement money, you are a candidate for investing in a “lifecycle” fund.
The Good and the Bad
So here is the bad news: when the lifecycle funds become available, you will have at make at least one more decision on how to invest your retirement money.
The good news: A lifecycle fund will limit the investment decisions you will have to make. So, if you may are not comfortable making investment decisions about your retirement money or if you are a person who just can’t ever make up his mind about how to invest your money for your own retirement, you are a prime candidate for a lifecycle fund.
What Are These Funds?
“Lifecycle fund” is a shorthand name given to funds that automatically invest your money in a combination of stocks and bonds. This combination changes as you grow older and get closer to retirement. As you edge closer to retirement, the fund will automatically invest a greater percentage of your funds into more conservative investments. As a practical matter, this means that more of your money will go into bonds and less into stocks. You won’t have to think about it; it will be done for you. No more annual decisions on how to balance your portfolio. And, presumably, no more excuses for not investing in the TSP.
So the one big advantage of the lifecycle fund is that you don’t have to do much thinking-a computer will do it for you.
Deciding how much to put into bonds; how much to put into stocks and then determining how much to put into each individual stock fund creates a mind block for some who apparently can’t stand the thought of living with the results of their own investment decisions. Some just decide not to make a decision and don’t invest in the TSP at all.
But with a lifecycle fund, you tell the computer your current age and your target date for retiring. Most people know when they hope to retire and it’s easier than making an investment decision.
Don’t panic but here is the other downside. While lifecycle funds may reduce the risk in your investments, they may also cut down on the potential gains you might get if you were to more money in stocks or more money in different stock funds.
Are Lifecycle Funds a New Concept?
The TSP has announced it hopes to have lifecycle funds available later this year. But while these will be a new option for TSP investors, lifecycle funds have already been around for more than a decade.
We don’t know how the TSP will structure lifecycle funds for investors in the Thrift Savings Plan. But there are considerable differences among these funds that are already up and running in the private sector.
Performance Results of Lifecycle Funds
The Wall Street Journal recently analyzed lifecycle funds available from fund companies such as the Vanguard Group and T. Rowe Price. The Vanguard fund blends 80% stock funds and 20% bond funds for investors who set a retirement target date of 2030. T. Rowe Price uses a different strategy. For a person selecting 2030 as a retirement date, it invests 90% of an investor’s money in stocks.
There are also lifecycle funds for people who are already retired. For retirees, Vanguard puts 20% of the investor’s money into stocks 75% in bonds and 5% into money-market funds. But, for the same target group, T. Rowe Price puts 40% in stocks, 30% in bonds and 30% in short-term bonds and money-market funds. Retirees can also stay with the lifecycle concept for up to 30 years after retirement so that they eventually have 20% of their money in short-term bond and money-market funds; 60% in other bond funds and 20% in stock funds.
What difference does the approach make? In 2004, the T. Rowe Price approach had the highest return with 14.2%.
The fund with the lowest return, according to the Journal, was the Fidelity Investments lifecycle fund for those targeting 2030 as a retirement date. This fund returned 10.5% in 2004.
By comparison, if you put all of your money into the super-safe G fund in 2004, you had a return of just over 4%. Even if you put all of your money into the C fund, your return was under 11% for the year. You had to add in the mix of the small company funds and the international funds to get equal or beat the T. Rowe Price results. (See last year’s results here.
What Do These Funds Mean to You?
The Thrift Savings Plan is being touted as a model retirement plan for the rest of our society. And, based on the structure of the other TSP funds, the lifecycle funds available to TSP investors are likely to be quite limited in the options offered, they will be conservative and they will have low fees.
So, for those investors who hate making investment decisions, get ready to make at least one more decision: Whether to invest in lifecycle funds. That may be one of the least stressful investment decisions you will have to make.