It might surprise you to know that when investing meets retirement planning, crafting a portfolio that suits your goals and life stage can actually get more complicated, not less.
Why is that? All investments carry risk; there are no guarantees in the financial world — and that is where the financial concept of “lifestyling” comes in.
But what is lifestyling? Lifestyling is an investment strategy that uses automatic adjustments to decrease the risk profile of your portfolio over time — typically, the closer you get to retirement age.
The general idea behind it is that when people retire, they want a fixed income, so a lower-risk portfolio with steadier returns is, in theory, more suitable for people in this age bracket.
So why should you care about lifestyling? Well, for all you know, you might have been signed up for it already, by default, through your employer’s 401(k) scheme. It’s a common, “one-size-fits-all” solution.
If you’re interested in finding out whether you should be worried by this (the risks) or whether it could be a good thing (the rewards), read on for our balanced critique of this financial phenomenon…
What is Lifestyling? How Does It Work?
Lifestyling, at its core, is an automated investment approach that shifts your assets from higher-risk investments (such as stocks) to lower-risk ones (like bonds or annuities) over time, until you reach a certain age or a predefined retirement date. Specific investment vehicles that employ this tactic are sometimes known as Lifestyle Funds or Target Date Funds.
The justifying logic behind lifestyling is that it maximizes returns during your earning years with higher-risk investments, and then shifts gradually to lower-risk investments that will better protect the capital you have built up the closer you get to retirement. In theory, by the time you hit retirement age, these funds will offer a steadier, more secure income stream for your most vulnerable years.
This gradated-risk-logic is also the source of its name: “lifestyling” is supposed to mirror the biological slow-down most people experience when shifting into retirement. Generally speaking, the older you get, the more conservative and risk-averse you become, as the realities of aging make it harder to bounce back from unexpected life emergencies.
As we mentioned in our introduction, lifestyling can be found in many pension schemes and personal retirement accounts. And if your employer — or employers, if you have worked at several different companies throughout your career — offers a 401(k) scheme, it is worth double-checking to see whether your account falls into this category.
Beware Multiple 401(k)s!
A quick sidebar before we jump into the risks and rewards associated with lifestyling: watch out for multiple 401(k)s!
Just because you’ve moved from one job to another, that does not mean your 401(k) has come with you.
And if you have a varied work history, you might have multiple work pension schemes running simultaneously, each with a different strategy.
In our opinion, this is both complicated and inefficient when you could combine them into a single 401(k) instead.
Greg Liszka, Iron Point’s President, comes across this scenario often:
We had a call the other day from a lady who was convinced that she had a work account from somewhere she worked 25 years ago that she never did anything with, and how is she supposed to find it? Well, that’s a great question, because the business changed ownership, and they also changed the plan numerous times. I guess she could call HR? It’s a difficult one…
We can consolidate 401(k)s so that there’s one contact, one spot, one strategy guiding the money rather than, “I don’t even know where it’s at!” You only have to track one statement. In an effort to not be in this lady’s position, maybe you should put it someplace where you are in charge and not a business you have left…
Consider this a gentle reminder to pause and check where your work-sponsored investments are!
(And if you needed some help consolidating your 401(k)s like we have suggested here, why not reach out to Iron Point Financial for help today?)
The Risk Perspective
At a surface level, lifestyling could seem quite appealing: maximize your earning returns to start, then minimize your risks later on… what could go wrong? As it turns out, when you oversimplify anything, quite a lot can go wrong. And these — the unintended consequences of oversimplification — are the main risks associated with lifestyling.
By giving control of your investment allocation to a robot, you could miss out on considerable gains. Say, for example, the S&P 500 has a great growth year, five years before your retirement date, but your fund has lifestyling built-in. In that scenario, you would actively lose out on that growth because the computer will automatically shift to “less risky” asset types, regardless of the overall economic outlook.
This first risk ignores economic conditions and market volatility, and the second is similar in that it also involves ignorance: ignorance of your personal goals and circumstances.
By their very nature, target date and lifestyle funds disregard your individual preferences and aims.
So if your 401(k) scheme happens to employ this kind of strategy, you could unknowingly be letting the fund manager force you into a box you would want nothing to do with if you were better informed.
The Reward Perspective
On the flip side, you could reasonably argue that systematically reducing your risk exposure over time is a decent strategy, especially for light-touch investors who don’t care too much about the details. If this is you, then you might be quite happy with the way lifestyling tries to shield your savings from market downturns (accepting that there are no true guarantees).
In short, lifestyling is a moderate and acceptable way to “play it safe,” as far as that is possible in the ever-changing investment world. It is certainly not glamorous, and it may not maximize your gains, but it can do the job for you if you just want a basic solution that you don’t have to think about very much.
This last point — not having to think too much about it — could also be ideal for people who are prone to anxiety or overthinking. If you are comfortable removing complexity from your asset portfolio by outsourcing its allocation to an algorithm, then lifestyling could be a viable option for your mental health.
Instead, you could choose to focus on other parts of life that are more important to you, like spending time with your family or fulfilling other life goals.
Greg Liszka, our founder, comes across this desire for safety quite often, especially amongst the IPF clients who are closer to retirement age:
“A big reason I see people wanting to retire early these days is that their parents are going into nursing homes and struggling through the last parts of their lives. So my clients are looking at that coming reality and wanting to get the experiences they want to prioritize out of the way before that. They want to go see the sunset over the Grand Canyon!
And when it comes to money at this stage, it’s a completely different game: you’re not going to grow a million bucks; you’re trying not to lose a million bucks and make it last for the rest of your life.”
With that in mind, resorting to a technique like lifestyling could feel like the simplest solution… but what if there were better alternatives that still allowed you to retain your wealth and fulfill your goals, in a truly personalized way?
The Iron Point Perspective: Personalized, Strategic Nuance
At Iron Point Financial, we advocate a more nuanced approach in everything we do.
We always start with a conversation about your unique goals and values, and work from there. Over time, we benchmark your progress against those goals and values, and then we adjust based on whatever is happening in your life — be that an early inheritance, a change in career, health issues, or anything else.
Therefore, to serve your changing needs faithfully, we typically avoid tactics like lifestyling, because they are too rigid and formulated for our liking.
That doesn’t mean we will ignore your need for income or safety later on in life; rather, it means we will look for other, more suitable solutions.
So, for example, instead of saying,“Here’s a Lifestyle Fund. The aim is to get you acceptable, steady returns.” We will start by listening to you and hearing your desires.
As Greg puts it, “Here’s my job. My job is never to tell you you can’t do something (unless it’s so obviously unattainable). My job is to figure out how to make it happen for you.”
How is this different from lifestyling or the other financial planning options out there? Well, in Greg’s words,
“Your typical advisor — a lot of the people out there — doesn’t want to think outside the box. They’ll just tell you, “Buy this mutual fund.” Everybody gets the same thing. Now, you may have it a little different from the next person, but there are only twenty funds to choose from in that selection — and how different can they really be?
And that’s what we fight against with every part of our being. Is that mutual fund the right solution for some people at some times? Yes. Will we employ that solution if so? Yes. But there are so many avenues out there that just take a lot more research and time to understand, once you can grasp them.
Alternatives to Lifestyling & Automation
As we mentioned in the introduction, when it comes to more conservative/lower-risk investment options for people in an older age bracket, this kind of hands-on approach actually requires more creativity, not less:
“More often, the uniqueness comes in the desire for safety than the desire for growth. The growth story is, frankly, easier. It can look like a lot of different things, but a lot of times, it looks similar.
But when people have a desire for income or safety, that goes way beyond saying, “OK, alright, well, we just need to give you more bonds. We need to sell you a bond filing.” Really? That sounds intellectually lazy and boring. It sounds awful.
The options we suggest can be difficult to describe to people, so we try to educate them to the degree that they want to be educated, but employing things like structured notes or CDs (a fancy way of saying we’re going to put together a bunch of different contracts to achieve a desired outcome).”
So where lifestyling is all about computers and preset algorithms, Iron Point focuses on human connection and context, which is where those bespoke contract combinations come in. Greg believes these can offer much better results for people approaching retirement age than an automated option:
“Right now, I have a 9.5%, a 105% and an 11% income story to tell. The long-term average of the S&P is 10.6% including dividends. So if you can get an 11% on a quite conservative income story, it’s compelling!
Into the managed side, we’re really going to customize something to you, and then we’re going to monitor it. Depending on the strategy we’re employing, it could be weekly, could be monthly. But we’re going to monitor it and make changes as conditions dictate.
So you’re hiring me to actively do a job, not sell you something. I don’t want to sell you something. I want to fix a problem.
So Mr Client, what are we trying to achieve? If you just want a steady income, then why don’t we put these together, and average a little over 10%, which is way more than any textbook will tell you is a safe withdrawal rate.
You’re looking at 3 or 4% for that safe withdrawal rate, but we’re getting you 10% plus. Even if you said the 9.5%, that is still more than double what the textbook would tell you is safe…
Concluding Remarks
The moral of the story is: you get what you pay for. If you’re happy settling for something that is better than nothing, lifestyling is a “good enough” option to see you through to retirement.
But if you’re looking for a more personalized service that can get you better returns while still taking into account the challenges of aging, then personalized financial planners like Iron Point can serve you with the care, focus, and creativity you deserve.
No matter what is going on in the world — whether it’s an election year, wars are raging, or international allegiances are shifting — we believe there is still value to be found in treating you like a friend, not a transaction waiting to rush through the sales door.
And if this approach appeals to you — if you need a lower-risk investment option that is also personalized — why not reach out to Iron Point Financial today, so we can start drafting an income story that works for you?
Or, if you don’t feel ready to talk to an adviser just yet, but you enjoyed this article on Lifestyling, why not sign up for regular email updates from our blog, so that you don’t miss future posts?
Iron Point Financial is here to empower you to secure a brighter tomorrow. We operate physical offices in Grove City, PA and Greenville, PA.
We primarily serve residents of Pennsylvania, Ohio, West Virginia and Florida but we also have registered broker licenses for 22 other states across the continental USA.
Further Resources
- Investing in a Qualified Longevity Annuity Contract: 6 Things to Know
- Tactical Asset Allocation: Controversial or Convenient? 3 Key Perspectives
- 10 Roadblocks to Avoid in Retirement Planning
- Retirement Planning in Western PA: 3 Important Steps to Take
Disclosures
- All investing involves risk, including the possible loss of principal.
- There is no assurance that any investment strategy will be successful.
- Before deciding whether to retain assets in a 401(k) or roll over to an IRA, an investor should consider various factors including, but not limited to, investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock.
- Please view the Investor Alerts section of the FINRA website for additional information.
