Lifecycle Funds – A Smart Way To Invest In Your Child’s Future

January 27, 2007

We often think of lifecycle or target date mutual funds in terms of investing for retirement. A recent article by Mapgirl reviews a Kiplinger magazine piece about why these funds aren’t for everyone. One demographic that they might be good for are people under the age of 5.

Generous Parents
Parents that want to put aside some money now to help their kids get started out in their adult life can make use of lifecycle funds. The concept is the same as saving for retirement with lifecycle funds. More aggressive investments focus on growth early in the child’s life then become more conservative as they approach their early to mid 20’s. The difference is that the money in a “launch fund” may be used for a college graduation gift or down payment on a new house instead of world travels or prescription medication.

Time Matters
This strategy is best used when the money is invested while the child is at a very young age. If you deposit a few thousand dollars into a 20 or 25 year target mutual fund before their first birthday the money has time to grow.

An Alternative
One thing you may be giving up by using this approach is a higher return. An alternative is to invest in a much more in an aggressive fund for the first 15 years then pull out the money and put it in an investment with less risk. As wise investors know, along with the growth comes risk.

My wife and I have experienced the disadvantages of this alternative first hand. Her grandparents put some money in American Century Giftrust (TWGTX) when she was a baby. After getting married we figured the money into our future financial plans. Of course when the time came to use the money in 2003, TWGTX was at it’s lowest point since June of 1991. We were very grateful for the gift. However, had the money been in a lifecycle fund the capital gains from the previous decade and a half would have likely been largely preserved in bond funds.

A Family Affair
This strategy can also be used by your family members wanting to build a “launch fund” for your little one. For grandparents that want to leave a legacy for the newborn or aunts and uncles that want Christmas or birthday ideas, contributing to a child’s lifecycle fund can offer big returns down the road. Check out the lifecycle funds offered by Vanguard, Fidelity, and T. Rowe Price to give your young child a leg up in the future.

Ben

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Ben

Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn’t like the other kids… His addiction to personal finance has paid off for his family and now he’s helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.


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