Lifestyle or Lifecycle Funds: Are They the Answer to Retirement Wealth Creation?

Abstract

In this article, we investigate whether lifestyle and lifecycle products offered by the mutual fund industry are designed to maximize the terminal wealth of investors. The overall findings are that the majority of lifestyle and lifecycle funds are unlikely to produce sufficient capital for an investor to live on once he or she retires. In order to produce terminal balances greater than $1,000,000, one needs to have a high exposure to equities (in the 80% to 100% range). Additionally, it is wise to contribute at least 10% annually to the fund, as this can increase terminal values by at least 40%. However, having a high exposure may cause distress to investors, particularly in bear markets, and it makes sense to employ a strategy that varies the asset allocation depending upon the time-varying nature of markets. The four alternative TAA strategies outlined attempt to take into account the time-varying nature of markets, and the results indicate that they produce superior performance relative to lifestyle and lifecycle funds. All dynamic asset allocation strategies dominate the conventional lifestyle and lifecycle funds by first order stochastic dominance, and thus, investors should prefer them.