Saving for retirement has many benefits, not the least of which is a steady stream of income for the remainder of an individual's life upon reaching retirement age. By investing in life-strategy or target-date funds, investors can rely on professionals to plan their investments leading up to retirement. Life-strategy funds and target-date funds investment funds were both introduced in the 1990s, and there are variations on both fund names. There are also nuances in the structure of both fund types that set them apart.
Target retirement funds, which are more commonly referred to as target-date funds, are investment funds overseen by professional money managers. They generally contain a combination of stocks and bonds, but the most distinctive feature of these funds is the date that is attached. Target-date funds have years attached that are displayed in five-and-10 year intervals -- such as 2025, 2030, etc. -- and the date represents the year in which investors plan to retire. As retirement gets closer, the makeup of a target date fund changes to favor income investments, such as bonds, over more growth-oriented securities, such as stocks. This is done so that investors nearing retirement do not take on too much risk, according to a 2012 Investment Company Institute report.
Life-strategy funds, which are more commonly referred to as lifestyle funds, take a fund-of-funds approach. This means that they direct investors' money into numerous other mutual funds managed by the same investment firm. Unlike target-date funds, which strive to reduce risk as investors get close to retirement, lifestyle funds incorporate a strategy at the onset of the fund and maintain that approach until investors reach retirement. Lifestyle funds are labeled as conservative, moderate and aggressive, which allows investors to decide for themselves the type of risk they choose to accept.
The primary advantage to target-date funds is that once invested, individuals do not need to worry about changing their asset allocation, or exposure to financial securities including stocks and bonds. Target-date funds are already designed to change each year, which means investors do not need to re-balance their portfolios to reflect changing market conditions. An advantage for lifestyle investors is that the fund's strategy does not change over time and instead remains true to the strategy associated with the fund.
One of the key disadvantages to lifestyle funds is the tendency of investors to use them inappropriately. Lifestyle funds work best and produce the types of returns that reflect a fund's strategy when investors use them alone. When combined with the investment strategies of other mutual funds, a lifestyle fund's strategy becomes less effective and returns become compromised. Target-date fund managers may have different interpretations for risk. Unless an individual finds out the specific securities in a fund, he could wind up owning securities that do not fit his risk tolerance when saving for retirement.
Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.