Source: sxc.hu Photo: lumix2004

There are a number of strategies that you can follow as you attempt to reach your retirement goal. One of these strategies is investing based on your age. This is especially popular for those planning retirement. By creating an investment plan based on age, it is possible for many to shift their asset allocation in an orderly manner as they approach retirement. However, it is important to realize that age based investing for retirement should not rely entirely on lifecycle funds that are so popular today, in part because so many 401k plans offer it. Creating a retirement investment plan based on your age is not the same thing as handing your financial well-being over to a lifecylce fund that claims to allow you to set it and forget it.

Principles of Age Based Investing for Retirement

Creating an investment plan is one of the basic activities that is likely to help you chart a course to a successful retirement. You can base this plan on your age, and how many years you have until retirement, transitioning your investment portfolio to more conservative investments as you near your retirement age.

Conventional wisdom says that you should invest more in stocks and other growth investments when you are younger so that you have time to make up for short-term losses with long-term gains. The idea is to build as big a nest egg as you can during your younger years, and slowly shift your assets into investment with less risk (like bonds ) as you near retirement and become more interested in preserving what you have while attempting to keep pace with inflation. One of the basic rules of thumb for this scenario is to subtract your age from 100. The answer is how much of your portfolio should be in growth investments like stocks. For example, Im 30. 100 30 = 70, so conventional wisdom says that I should have 70% of my investments in stocks.

However, you shouldnt rely completely on conventional wisdom when investing for retirement, nor should you blindly follow some rule of thumb. Instead, you need to build a road map to your desired retirement outcome by considering the following factors:

• Risk tolerance (financial and emotional)

• How much money you want
• The income you need to cover expenses in retirement
• Possible income streams you can cultivate
• How many years you have until your desired retirement age
• Likely returns on your investments, depending on asset class

You should also consider what could happen if we see a stock market crash just before you retire. This is one of the reasons that people slowly move their assets into bonds and cash as they get closer to retirement. That way, if the stock market crashes or the economy gets too volatile just before retirement is reached, the damage is limited to a smaller portion of the portfolio. It is important, though, to realize that you will still need to keep some of your assets in growth investments, even in retirement. You dont have to follow the conventional age rule if you are not comfortable with it, but a portion of your portfolio should still be growing at a solid rate in order to help you maintain a nest egg that wont run out.

Lifecycle Funds

One of the more popular investment products these days is the lifecycle fund. A lifecycle fund is a managed mutual fund that automatically adjusts your assets for you, depending on your age. The fund manager chooses a higher concentration of growth investments while you are younger, and then shifts the allocation as you near retirement. You can choose lifecycle funds built around different goals, and different lengths of time.

As tempting as it might be to set it and forget it with a lifecycle fund, you need to be careful. Numerous studies have shown that many managed funds dont fare any better than their less-pricey counterparts. Additionally, you have to consider that the costs associated with lifecycle funds can eat into your returns, leaving less money in your pocket. In many cases, you can do just as well or better by creating your own plan, and using index funds and/or ETFs to invest in a wide range of asset classes, tweaking your allocation as you age.

In the end, age based investing works best when done for retirement. It can be a good way to build your nest egg and then manage it as you get older. But you are probably better off creating your own plan, based around your individual goals and situation, rather than relying on a lifecycle fund.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.