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

Posted: 21 May 2019

Date Written: January 25, 2012

Abstract

In this paper we investigate whether lifestyle and lifecycle products offered by the mutual fund industry are designed to maximise terminal wealth of investors. The overall findings are that the majority of lifestyle and lifecycle funds are unlikely to produce sufficient capital for investors to live on once they retire. 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, it therefore makes sense to employ a strategy which varies the asset allocation depending upon the time varying nature of markets. The four alternative TAA strategies outlined attempt to take into the 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 by first order stochastic dominance conventional lifestyle and lifecycle funds and should be preferred by investors.

Keywords: Lifestyle and lifecycle funds, tactical asset allocation

JEL Classification: G11

Suggested Citation

Okunev, John, Lifestyle or Lifecycle Funds Are They the Answer to Retirement Wealth Creation? (January 25, 2012). https://doi.org/10.3905/joi.2014.23.4.037. Available at SSRN: https://ssrn.com/abstract=2207120 or http://dx.doi.org/10.2139/ssrn.2207120

John Okunev (Contact Author)

Coda Asset Management ( email )

10 Arnold St
Queens park
Sydney, 2022
Australia
+61266744575 (Phone)

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