Lifecycle Funds from TD Ameritrade for Retirement and College Planning

One challenge in planning for retirement, or any goal with a particular date, is how to invest to meet that goal. How much should an investor have in different types of investments? How much in stocks, bonds, and other asset classes? How should the proportions change over time? For example, a person with one year to go on his retirement may wish to have more of his portfolio in fixed income than equities, as it provides more certainty about the future value of the investment.

Recently, many mutual funds have set up lifecycle or target date funds that are designed to assist people in meeting investment goals by a particular date. They tend to have more of the assets in equities when the target date is far away and reduce that amount, substituting fixed income, as the date approaches. Now, TD Ameritrade has put together a family of ETFs that allow investors to make lifecycle investments at a lower cost -- 65 basis points -- than the lifecycle mutual funds.

The TDAX Independence Exchange Traded Funds series from XShares Advisors provides investors with 5 target date funds -- 2040, 2030, 2020, 2010, and its Independence in Target Fund (designed for a near term target. The table depicts the funds asset allocations at inception and target date.



Assets will be adjusted as the target date approaches, from a more aggressive allocation that emphasizes equities to a more conservative allocation, that emphasizes fixed income. Each portfolio is designed to have 89%fixed income, 3% international equity, and 8% domestic equity on the target date. After reaching the target date, the allocation is adjusted over 5 years to 68% fixed income, 8% international equity, and 24% domestic equity. The table below shows the starting and ending breakdowns for each fund.

What the experts say
In a recent article, noted retirement experts Zvi Bodie and Jonathan Treussard of Boston University discussed how appropriate Target Date Funds were for people in planning their retirement.2 They note that many people in self-directed retirement plans, such as IRAs and 401ks may not know enough about investing to choose the right funds, or may not put in the time and effort to find them. Simple target date strategies may be an improvement over many of the choices made by people who do not know that much about planning. (And let’s not forget the fact that employers do little to educate their employees in this area). Bodie and Treussard observe that there are certain people for whom a target date fund is a good solution. Others, however, may be more risk averse or have a higher exposure to market risk through their means of earning an income, and may benefit more from a investments that have greater safety and are matched to their retirement date, such as Zero Coupon TIPS (Treasury bonds with prices that adjust upward for inflation) with a maturity date matching their retirement. Investors need to consider their risks when choosing retirement fund options.