While I am an advocate for purchasing dividend paying common stocks and some dividend paying ETF’s for international exposure,Â other ideas make sense in certain cases.
I personally tend to shy away from mutual funds.Â In particular, funds of funds which typically have a larger expense ratiosÂ eating away at your money!Â However, I thought that some readers might be interested in this article on life cycle funds.Â
Lifecycle funds were designed for retirement investors, who might draw down their nest egg over 20 or 30 years. But some shareholders are using the funds to amass money for a home purchase, where they will need their savings on a single day, or college, where costs should be over in just four years.
The problem: When lifecycle funds reach their target date, they typically have 50% to 60% of their money in stocks. “You run that horrific risk of having too much equity exposure when you get that tuition bill,” Mr. Mortimer says.
Still, you could use lifecycle funds for these other goals. The trick: Buy a fund that reaches its target date 10 or 15 years before you will buy a house or pay for college. That will ensure you take a more reasonable amount of risk, because lifecycle funds continue to trim their stock exposure in the years after they reach their target date.
Some retirees arelifecycle funds in the same way folks ladder individual bonds. This isn’t a great investment strategy, because there’s so much overlap between the funds’ holdings, but it could help you manage your retirement spending.
Suppose you plan to quit the work force in 2015, when you turn age 65. John Haslem, professor emeritus of finance at the University of Maryland, says you might buy a 2015 fund to cover the first 10 years of retirement, a 2025 fund to pay for the years from ages 75 to 85, and a 2035 fund for your final years.
He suggests combining these three funds with an emergency reserve, which you could tap for income during rough markets. How you divvy up your money among the three funds and the emergency reserve will depend on your tolerance for risk and your life expectancy. “This allows people to segment the problem into manageable pieces,” Prof. Haslem reckons.