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Autopilot for retirement

You simply buy an age-appropriate fund, forget about the market, and get on with your life. The only thing to consider is raising your contributions.

(Article by Jane Bryant Quinn from Newsweek, 27 March 2006)

For making money easy to manage, nothing beats "lifecycle" or "target retirement" mutual funds. They're simple, well diversified and will almost certainly deliver better results than the scramble of funds that you own now. Investors who use lifecycle funds in their 401(k)s, even for just part of their savings, earn higher returns than those who don't, according to performance studies by the consultant Hewitt Associates. If that doesn't hook you, nothing will.

More than half of the larger 401(k)s offer lifecycle funds—an amazing rate of acceptance for a product that's just 10 years old. By early next year, Hewitt expects to see them in as many 65 percent of plans. You can also buy them individually from such well-known, no-load (no sales charge) companies as Vanguard, T. Rowe Price, Fidelity and American Century.

A true lifecycle fund is simplicity itself. Each one has a "target" year in its name, such as 2015, 2030 or 2040. You pick a fund named for a year that's close to the date you'll be 65. For example, if you're 45 today, you'd pick a fund dated 2025. It will be largely invested in U.S. and international stock funds, with the rest in bond funds.

As you get older and retirement draws near, your lifecycle fund will gradually grow more conservative. The manager will move some of your money out of stocks and into bonds. That process continues even after retirement. By the time you're 80, you'll be almost entirely in bonds.

All this happens automatically, without your having to worry about it. You just buy an age-appropriate fund, forget about the market, and get on with your life. The only thing to consider each year is how much to raise your contributions.

Lifestyle funds make investing so easy that it's a waste of money to buy from a broker or planner and pay the sales and marketing charges, says Don Cassidy, senior research analyst at Lipper, a mutual-fund information group. Planner Brendan McNamar of Middle Wealth Solutions in Galloway, N.J., adds: "The easiest, safest money you can ever make in investing are the expenses you don't pay."

The low-cost provider is, as usual, the Vanguard Group. Its Target Retirement Funds charge about 0.2 percent a year. Next come Fidelity's Freedom Funds, at 0.56 percent to 0.79 percent; T. Rowe Price's Retirement Funds, at 0.57 percent to 0.81 percent, and American Century's My Retirement Funds, at 0.76 percent to 0.95 percent. Don't pay a nickel more.

Besides fees, look at how much these funds allocate to stocks at various ages, says Steve Blankenship of Heritage Financial Planning in Grapevine, Texas. T. Rowe Price takes the most aggressive stance. At the age of 65, your fund might be more than 55 percent in U.S. and international stocks. That means higher market risk, but it also offers more opportunity, says Price's senior financial planner, Christine Fahlund. The odds are high that over many years, you'll accumulate extra dollars for additional spending or a larger estate for heirs.

By contrast, American Century believes in funds with "a limited amount of shock potential," says Jeff Tyler, the senior portfolio manager. At retirement, his funds hold 45 percent in stock. That's enough to pay your way, if you've saved enough. It also holds down the risk that you'll panic and sell in a year that stocks decline. If you fear that you can't afford to retire, you might rush into stocks to try to make up for the years you didn't save. But that's a Las Vegas bet, Tyler says. What if you lose? You'll be worse off than you were before. Those who failed to save should simply stay at work.

A retirement target of 45 percent in stocks used to reign at Fidelity, too. But this month the firm announced an increase to 50 percent, for greater long-term growth. The reasons? We're living longer and medical costs are on a tear, manager Jonathan Shelon says. Stock allocations will increase for younger and older ages, too.

Even Vanguard, the most conservative of the group, is stepping up its commitment to stocks. The exact amount hadn't been announced when this column went to press. But the old retirement target—roughly 31 percent stock—seemed pretty low, given our longevity. The new target won't be aggressive, Catherine Gordon, a Vanguard principal, says. "We're moving from conservative to middle of the road."

So that's the core universe for lifecycle funds. You can decide, yourself, if you prefer low risk and income or would rather own more stocks to grow your estate for heirs, says Christine Benz of Morningstar. Just remember: fees always count.

When you look at these funds, by the way, it's important to get your terminology right. Lifecycle is the group's general name. There's another, excellent type of fund known as lifestyle—also well diversified among stocks and bonds. But the "style" funds always keep roughly the same percentage of their money in stocks, rather than growing more conservative as you age. I like those funds, too, when they're low cost. But for true buy-and-forget (my favorite investment philosophy), get a lifecycle fund. For do-it-yourselfers, it's the smart and sensible choice.