Making sense of Vanguard's Lifecycle super offering

While Vanguard Australia is best known for its low-cost ETFs and managed funds, the investment manager recently unveiled a superannuation product created especially for Australian investors.

Low costs (0.58%) aside, what differentiates Vanguard’s super from that of its peers is what’s called its Lifecycle investing option.

To the uninitiated, Lifecycle investing refers to sequencing risk: Its fund manager-speak for progressively dialing investment risk down as investors get older.

In short, Lifecycle investing strategically allocates more of an investor’s assets into defensive assets over time to replace income once they’re no longer working.

Auto-adjusting Lifecycle option

Here’s a snapshot of how the fund would automatically adjust an investor’s asset allocation over time:

The fund’s Lifecycles focus on growth investments in your younger years and gradually introduce more defensive investments as you age.

For example, at age 64 the asset allocation is half growth and half defensive. Over the next 10 years defensives outweigh growth (at 56.6%) and this climbs to 60% once you reach 85.

From age 82 onwards, the asset allocation is designed to have a greater emphasis on reduced risk to shield retirement savings from the impacts of volatility.

Asset allocation at age 64

Is Lifecycle investing a good idea?

While Lifecycle investing is a low-cost automated way to progressively reduce your exposure to investment risk, there some key elements you need to weigh up.

For starters, no two investors are the same, that's why it pays to seek professional financial advice around two key factors: Your current financial position and what sort of retirement you're looking for.

It's also worth noting that while Lifecycle investing can reduce investment risk, it leaves investors exposed to market risk, especially major market corrections, or even worse market crashes.

History suggests high risk investments can expect between 4 to 6 negative returns over a 20-year period.

Will Vanguard's super products attract investors?

The short answer is yes, competitors expect the firm to pick up 4-8% of the $3.4trn superannuation market, particularly members who are invested in passive indexed options.

How many investors opt for the Lifecycle product remains to be seen.