Why Lifecycle Funds are Particularly Good for Dentists

April 4, 2016
DMD Staff

If you don't know a lot about investing and don't have a lot of time to devote to it, perhaps a lifecycle fund-also sometimes known as a target-date fund-is something you should look into.

If you don’t know a lot about investing and don’t have a lot of time to devote to it, perhaps a lifecycle fund—also sometimes known as a target-date fund—is something you should look into. There are many different types of lifecycle funds with different allocation strategies, but the basics are pretty similar: A lifecycle fund divides your retirement savings among different asset classes, and then adjusts your holdings as you age. Most lifecycle funds are diverse and relatively easy for the novice investor to understand. But the best benefit of all is that you don’t necessarily need to know much about investments to make a lifecycle fund work for you.

That’s because lifecycle funds are no-hassle by design. When you are younger and can take on more risk, the fund will be invested more heavily in mutual funds that own stocks. These investments are more risky, but they offer the best opportunity for asset growth. As you grow older, the mix of investments typically shifts to become more conservative. The fund will eventually hold an increasing share of fixed-income mutual funds, which are generally less volatile than stocks.

Each lifecycle fund is designed for investors who plan to retire in, or close to, the year identified in the fund’s name (the “target year”). So, for example, if you plan to retire 20 years, you’d look for a fund with 2035 in its name. With a lifecycle fund, you turn over the often complex task of managing your assets over to professional investment managers who make ongoing asset allocation decisions for the fund.

A Good Option for Dentists

One of the main advantages of lifecycle funds is that your retirement funds will be well diversified without you having to choose different investments on your own. Lifecycle funds fit the profiles of many investors, but they can be particularly effective for professionals whose income doesn’t fluctuate a great deal from one year to the next. While you are always striving for growth in your dental practice, for many dentists, your income will remain relatively steady over the course of your career. That means that the initial legwork involved, including the different types of lifecycle funds and the funds’ investment goals, should not necessarily require much adjustment, even if there are incremental increases in your income.

Investor Beware

As with any investment strategy, consider seeking guidance from a professional financial advisor or working with your retirement provider to ensure that this is the right choice for you. As with all investments that are market-related, lifecycle funds do indeed bear market risk. And the funds can differ in terms of the expenses they charge. Depending on how the investment provider—such as Vanguard, Fidelity, and T. Rowe Price, among many others—calculates fees, those expenses can add up quickly. You should consider the expense rate for the fund, which is often calculated as a percentage of the assets under management.

Lifecycle funds are constructed as a “fund of funds,” meaning that investments from a wide variety of funds are all wrapped up into one fund. This may mean that the individual funds that make up the overall lifecycle fund can carry their own expenses. This “layering” of expenses isn’t always made clear to the investor. Before investing, look into the fund’s expense structure and the investment provider’s reputation for transparency.

Always keep in mind that even if someone else is managing your money, the responsibility for retirement planning rests with you. A “set it and forget it” sounds appealing, and it can be, but always be aware of how much you’re saving and how the fund is performing.

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