More people are saving for retirement through personal investing and company-sponsored 401k plans. Few companies offer full-blown pension plans. With more personal money management occurring, investment firms have developed mutual funds to make the process less intimidating.
Definitions
A life strategy fund is also called a life-cycle or lifestyle fund. It is an investment vehicle that combines various funds to reflect your risk tolerance, age and purpose for investing. The length of time until the principal is withdrawn is also a consideration. According to Investopedia.com, a target-date retirement fund is very similar to a life-cycle fund except that it designates a specific date for maturity. Presumably, this is your anticipated retirement date. Some financial planners and investment firms use these terms interchangeably.
Different Approaches
These investments are also referred to as target-date or target-risk. Target-date funds allocate your assets based on the date of your retirement. Most will typically include the retirement year as part of the fund's name, such as 2015, 2025, 2035 and so on. Target-risk funds, or the life strategy funds, are based on your tolerance for risk---conservative, moderate or aggressive. As with all investing, the greater the risk, the greater the potential for earnings. Although target-date funds change your asset allocations toward conservative investing as you near retirement age, you are responsible to alter target-risk funds.
Fund Makeup
Life strategy or target-date retirement funds are composed of stocks, bonds or fixed-income securities, and short-term fixed income or cash assets. As you move closer to retirement, your target-date fund's asset allocation moves from being more heavily invested in stocks to one of being more heavily invested in bonds. Stocks carry a higher risk, and as you approach retirement, financial advisers suggest moving your investment to less risky bonds. Your investments will earn less, but your principal will be more secure. You assume responsibility to make asset allocation changes to a life strategy fund.
Advantages
One of the advantages of a target-date retirement fund is that it requires little effort on your part. Additionally, investment requirements are minimal. Many investors use these as "set it and forget it" funds. Once it is established, you can continue making contributions without much time or effort. These funds also appeal to investors who lack confidence and knowledge about investing their money.
Disadvantages
There is no such thing as a one-size-fits-all investment. The aspect of hassle-free investing requires that these funds be treated the same way for all investors. Your risk tolerance may be far different from that of a colleague. You may want to consider a life strategy fund to better control the risk level, especially if you are at either end of the tolerance spectrum. However, you are responsible to make changes to the fund as you approach retirement. It will not happen automatically as with a target-date fund.
Other Considerations
Some financial advisers do not recommend these funds. Although they can help limit risk while you are saving toward retirement, you may find that they have not earned as much as other funds. This is an important consideration as many people may live 20 to 30 years beyond retirement.
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