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Dr. Don Taylor, CFA, advice columnistPros and cons of life-cycle mutual funds

Dear Dr. Don,
My husband and I are both 33. I'm a stay-at-home mom for our three children. I'll return to my career as an auto claims litigation adjuster in a year. He's got nine plus years before he retires from the U.S. Army. My husband's taxable income is $33,319. He doesn't pay much in taxes now but we think he'll see a further income tax break because he opened a Thrift Savings Plan a month ago and is going to contribute the $15,000 annual maximum into a life-cycle 2030 fund.

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We have no debts or retirement savings. We do have $100,000 in a six-month CD thanks to the sale of our southern California home. We now rent in Georgia. We want to use $8,000 of our savings to open a Roth IRA for him and a spousal Roth IRA with Vanguard for me. We're questioning whether we should go with another life-cycle fund by choosing the Vanguard Target Retirement 2035 fund for the Roth accounts. What do you think?
-- Trina Triangulate

Dear Trina,
I'm impressed that a family of five with an annual income of $33,000 can make the financial commitment to maximize his contribution to the Thrift Savings Plan. Combine that with contributing $4,000 each to the two Roth IRAs and you've certainly jump-started your retirement savings program.

Roth IRA contributions are limited to your taxable compensation. From what you've told me, that doesn't appear to be an issue. Talk to your tax adviser or review IRS Publication 590, Individual Retirement Arrangements, if you're uncertain about your ability to contribute.

I don't know your plans for the rest of the money you have invested in the CD, but with 2006-tax-year contributions and 2007-tax-year contributions you could have a total of $16,000 invested in the Roth IRA accounts by April 16, 2007.

I don't recommend specific mutual funds to readers, but I can say that the life-cycle funds are a good idea for investors who don't want to take an active role in managing their investments. The idea behind a life-cycle fund is that the fund manager will change the investment allocations in the fund based on the targeted investment horizon. 

Theoretically, as you get closer to the target date, the portfolio is invested more conservatively because you're past the point where the portfolio has enough "rebuilding years" to recoup any losses it might experience prior to your planned retirement.

Two competing life-cycle funds with the same target dates, however, can have very different approaches to planned asset allocations. There's also an argument against this style of funds because the more conservative asset allocation might not adequately protect retirees from inflation eroding the purchasing power of their investments.
That said, there's a lot of good in life-cycle funds for young investors like you: Professional management, a less conservative bent on investing and automatic rebalancing of the investments are three things that spring to mind.

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "financing a home," "saving & investing" or "money."'s corrections policy -- Posted: Sept. 21, 2006
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