For many people saving enough for retirement may mean striking a delicate balance between investing for optimum growth with minimum risk. Those that worry about the risk factors involved in investment or those that lack experience in making these kinds of decisions may find lifecycle funds useful. Also often known as target, age-based and target-date funds these products may make it easier and safer to save for retirement.
What are Lifecycle, Target-Date and Age-Based Funds?
These funds are set up to last for a certain period of time and will often have a target date built into their name. This may, for example, be geared towards the projected retirement year of the individual. The money invested in these products is managed by the fund company on a lifecycle basis with investment strategies changing over time as the fund reaches certain stages in its life.
Why is a Lifecycle Fund Often Used to Save for Retirement?
Lifecycle funds are popular with many retirement savers as they take the need to make decisions away from the individual. An inexperienced saver doesn't have to decide how, where and when to invest their money as this is done for them by the fund manager. They get an automatic balancing of risk vs. returns over their investment years.
Most target funds will work to a specific schedule where risk (and potential return on investment) is higher to start with. Over time the holdings in a fund will change to become more conservative as the target date approaches, thus minimizing risk to the investor. This follows the basic principles of many long term retirement investment strategies that balance risk in early years with safety in later ones.
Target-Date and Target-Risk Lifecycle Funds
Some lifecycle funds work on a "one size fits all" basis where investments are moved around as time passes automatically. These target-date funds may follow a specific pre-set asset allocation strategy for all investors.
Target-risk funds may differ according to individual preference. Those that are willing to take more risks may be able to opt for an appropriate investment strategy, as can those that are willing to take some risk and those that are risk-averse. These strategies can usually be changed over time if the individual wishes.
Are Lifecycle Funds a Good Way to Save for Retirement?
A lifecycle fund may work out to be a good solution for some; others may find better solutions with different retirement investments. This depends on the individual, their ability/willingness to be directly involved in the savings process, their attitude to risk and when they start investing for retirement.
Like any savings strategy a lifecycle fund comes with some advantages and disadvantages that may be worth investigating before choosing this as an investment solution. Those planning for retirement may also find it useful to learn more about the role that asset allocation plays in investing and how to estimate income needs to help plan and evaluate savings goals.
Sources: Investopedia; The Motley Fool
Carol Finch - Carol Finch is the Topic Editor for Retirement Planning, Budgeting, E-Commerce & Technical/Business Writing on Suite101.
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