The Ultimate Strategy for Millennials – Lifecycle Investing

Authored By: Ed Rempel | Publish Date: June 29, 2017

If you are under age 40 and saving to become financially independent, the ultimate strategy for you to understand is Lifecycle Investing.

It has worked 100 per cent of the time in the last 150 years and increased portfolios at retirement by an average of 63 per cent.

Results are so consistent because it reduces one of your biggest financial risks, “Last Decade Risk”.

Lifecycle Investing is not for everyone, but understanding the concept can change your entire approach to managing your money.

To understand Lifecyle Investing, first you need to understand what is wrong with the traditional method of “bit-by-bit” saving.

‘Last Decade Risk’

Millennials are mainly saving for their future like their parents did – a bit every year, such as making an annual RRSP or TFSA contribution. This “bit-by-bit” saving causes a big risk called “Last Decade Risk”.

The vast majority of the investments most people own during their working years are in the last 10 to 15 years before retirement.

For example, let’s look at Robert. He invests $10,000/year in his RRSP starting at age 25 and increases that by inflation every year as he gets more RRSP room, like many Canadians do. With an average eight per cent return, here is how his investments grow:

Here is the scary part – 64 per cent of all the investments that Robert owned over 40 years (age 25-65) were owned in just 10 (after age 55) – and 82 per cent were only owned after age 50!

What happens if the last decade before retirement is a bad decade for his investments?

Since 2000-2009 was the second worst decade ever for the stock market, there are many stories of people who saved and invested consistently for 40 years and yet found that one bad decade in investing just before retirement left them far short of the retirement they want.

For example, note in the table below that if Robert’s first decade is a bad decade, he ends up with only 15 per cent less at age 65. However, if his last decade is a bad decade, he retires with 52 per cent less.

Robert loses more than half his retirement income from one bad decade with no growth!

For Millennials, this means you are betting your retirement on your investment returns in one future decade, probably the decade from 2040-2050.

Is it smart to bet your retirement on getting a good return in that one future decade just before you retire?

How do you avoid “Last Decade Risk”?

Lifecycle Investing – Diversifying across time

The solution to “last decade risk” is a groundbreaking strategy by two Yale professors, called “Lifecycle Investing”.1 They advocate borrowing to invest when you are young and paying it off in your 50s. They show how this actually reduces risk by “diversifying across time”.

The book is quite technical and obviously written by two math geeks. But their concepts are very practical.

First, let’s understand “diversifying across time”. Here are the stock market holdings of two brothers at two points in their lives:

Note that they have the same exposure to the stock market during their lives, but Paul is more diversified across time. His “last decade risk” is lower.

The concept of “Lifecycle Investing” is that Paul could do this by borrowing $100,000 to invest at age 30 and allocating $100,000 of his stock market investments to bonds at age 60.

Most people are comfortable with the benefits of diversifying with different types of investments. Why not also diversify across time?

Does Lifecycle Investing make sense?

If Robert told you that he plans to invest very little in the stock market for 30 years, and then invest heavily in the stock market for just the last 10 years before retiring, would you think that is smart?

A better question is – does traditional “bit-by-bit” investing make sense when it usually means having 10-30 times more money in the stock market at age 60 than at age 30?

Lifecycle investing is what we do with our homes. Most people would think nothing of putting $25,000 down on a $500,000 home. If you live in that home for 40 years, you have $500,000 invested in real estate each year.

This is the Lifecycle Investing concept – borrow a large amount early and slowly pay it off in order to have the same amount invested every year.

Think of it as buying your retirement nest egg with one large investment at age 25, instead of buying it “bit-by-bit”.

This study proves that if done right as part of a long-term strategy, borrowing to invest can actually reduce your retirement risk by diversifying across time.

Asset allocation with Lifecycle Investing

With Lifecycle Investing, you allocate your investments between stocks and bonds based on the total you will invest during your lifetime. This is called “dollar years”. If you are going to invest $10,000 every year for 40 years, then you have $400,000 “dollar years”.2

You can think of the $10,000 you plan to invest in each future year as a bond when you are determining how much to invest into stocks vs. bonds.

For example, let’s say that you want to invest 75 per cent in stocks and 25 per cent in bonds. Instead of investing the $10,000 based on 75/25, with Lifecycle Investing you would add up the total investments you will invest over the next 40 years ($400,000) and invest 75 per cent of that figure, or $300,000, in stocks.

Since you only have $10,000 in year 1, you would borrow the maximum you are comfortable with each year and invest 100 per cent in equities until you reach $300,000 invested.2

Once you reach $300,000 in stocks, you slowly pay down your investment loan. Once it is paid off, then you start investing in bonds, until you reach your desired asset allocation of 75 per cent stocks and 25 per cent bonds.

The actual formula calls for a very high amount of leverage in year 1. Since the Yale professors are math geeks and not investors, they are not aware of all the methods of borrowing to invest and advocate only 2:1 leverage. The concept is to borrow what you are comfortable with and what you can qualify for in the early years.

Stages of life with Lifecycle Investing

Essentially, you borrow in your first decade of investing and invest 100 per cent in stocks. You slowly pay off the leverage by your early 50s. Then you start adding bonds, moving to your desired mix by retirement.

In practice, this process leads to three periods through your working life:

  1. High leverage period – Leverage 2:1 (or more) and invest 100 per cent in stocks – no bonds. If you have $10,000 to invest, borrow an additional $10,000 (minimum) to invest each year. The maximum would be to borrow in year 1 the full $290,000 (for 75/25 allocation) or $390,000 (for a 100 per cent equity allocation) to get you to $30,000 (or $400,000) in stocks. This period lasts until your stock market investments reach your target percentage of your lifetime amount invested (e.g. 75 per cent of $400,000 = $300,000). Typically, this period is the first 10 years of your investing life.
  2. Reducing leverage period – Pay off investment loan slowly and maintain 100 per cent in stocks. Typically eliminate leverage over 20 years by early 50s.
  3. No leverage period – Start introducing bonds moving to your desired allocation (e.g. 75 per cent stocks/25 per cent bonds) by the time you retire.

Does Lifecycle Investing work?

The study proved Lifecycle investing would have increased retirement income 100 per cent of the time for anyone retiring in the last 96 years.1

Lifecycle investing can be applied to either invest the same average amount as traditional “bit-by-bit” investing with less risk, or to have the same risk with more invested.

Here are the actual results for people that retired between 1914 and 2009 investing a constant percent of their income for 45 years1:

You may be wondering – is this just better because they invested more in stocks? The answer is no. The Lifecycle Investing strategy has the same average investment in the stock market as the “Fixed 75 per cent Equities” strategy.

The results are consistently better because you have more invested earlier. This is the benefit of diversifying across time.

I was surprised that the results were better 100 per cent of the time. Remember, this includes people that had the Great Depression of the 1930s either at the beginning or the end of their working life. Even with a huge crash at the beginning or end of your working life, Lifecycle Investing always came out ahead.

You can do Lifecycle Investing fully, or just apply the concepts of investing more while you are younger to diversify across time. Either way, this strategy can make a huge difference in helping you become financially independent.

How do you implement Lifecycle Investing?

It is best to think of it as a concept. The Yale study showed that, when you are under age 50, the amount of money you have invested is far more important than your rate of return.

Options to implement Lifecycle Investing:

  1. No leverage: Focus your energy on financial planning concepts like how to save & invest more. Find creative ways to invest larger amounts in equities while you are young.
  2. Investment loan: Take one large loan or a series of small loans when you are young, based on the amount you are comfortable with and what you can qualify for. The most common types of investment loans are 100 per cent loans and 3:1 loans. Most banks will only take mutual funds or seg funds as collateral, not ETFs or individual stocks.
  3. Home equity: Once you own a home, you can use a secured credit line to borrow to invest. Lifecycle Investing annually from your home equity might work similarly to the Smith Manoeuvre strategy.

Just to be clear, borrowing to invest is a risky strategy and is not for everyone. If you cannot stomach the ups and downs of the market, may make the “Big Mistake” (selling or investing more conservatively after a crash), or if you chase performance, then borrowing to invest is probably not the right strategy for you.

Borrowing to invest should always be a long-term strategy to increase your odds of success. I would suggest a minimum of 20 years.

If borrowing to invest is too risky for you, the concept is still very practical. Invest larger amounts in equities while you are young to diversify across time.

Having the right plan & strategy beats investment returns

If you want to implement Lifecycle Investing, it is best to create a Financial Plan first, to decide how to do it over your life. Don’t do it without a plan.

There are many ways to do it. The right strategy for you might be large, small or no leverage. How will this fit in with the rest of your finances? It is far more effective to do it as part of your Financial Plan.

Lifecycle investing is worth discussing, because it points out the huge “last decade risk” with traditional “bit-by-bit” investing and shows that the right leverage strategy over many years can sometimes reduce retirement risk by diversifying across time.

Most investors in their 30s and 40s believe that the most important part of their future retirement is the rate of return they get on their investments. This often leads them to ignore financial planning and just focus on investments. The concept here shows that having a plan and using the right strategy is far more important than rate of return.

Most people will have 80 per cent of the investments they will own during their working life after age 50. The rate of return you have before age 50 is not that important because it is on a relatively small amount of money.3

For example, note that Robert owned only 2 per cent of his investments from age 25-34 and 11 per cent from 25-44. The rate of return he makes before age 45 or 50 makes little difference. Finding ways to get more money invested sooner is far more significant.

It is difficult for many investment-focused people to believe that the most critical issues for their future are having a comprehensive Financial Plan and using the right strategies. The concepts of Lifecycle Investing provide a useful example of the importance of having a Financial Plan.

Lifecyle Investing is the ultimate strategy for Millennials who want to become financially independent to understand.

Essentially, you borrow in your first decade of investing and invest 100 per cent in stocks. You slowly pay off the leverage by your early 50s. Then you start adding bonds, moving to your desired mix by retirement.

It has worked 100 per cent of the time in the last 150 years and increased portfolios at retirement by an average of 63 per cent.

Results are so consistent because it reduces one of your biggest financial risks, “Last Decade Risk” by diversifying across time.

The traditional way of investing money “bit-by-bit” creates a big “last decade risk”, because 80 per cent of your investments over your working life are usually after age 50. If your last decade is a bad decade (like 2000-2009), you could lose more than half of your retirement income.

Lifecycle Investing is a practical example of how having a Financial Plan and using the right strategies are the most critical issues in having the future that you want.

If you want to implement Lifecycle Investing, it is best to create a Financial Plan first, to decide how to do it over your life. Don’t do it without a plan.

Ed Rempel (CPA, CMA, CFP) Is a financial blogger at Unconventional Wisdom (

1 “Lifecycle Investing”, Ian Ayres & Barry Nalebuff, 2009

2 The actual formula would involve calculating your “dollar years” every year as the sum of your investments today plus all the amounts you plan to invest in the future.

3 Many people become more conservative and allocate more to bonds in the last 10-15 years before retirement. This probably means a lower rate of return. Every 1 per cent/year lower return you make after age 50 wipes out 4 per cent/year of the return you make for the first 25 years from age 25-50, since you will own 80 per cent of their investments after age 50.



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