 Pros
and cons of life-cycle mutual funds
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 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.
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."
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