What is a lifestyle fund? Lifestyle funds are mutual funds that invest in stocks, bonds and other assets to create portfolios with low-risk investments. They’re typically used by people who want to save for retirement or college tuition but don’t have the time or expertise to manage their own money.
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Lifestyle funds are a type of investment that is designed to help people with their retirement. They are typically low-risk and offer tax advantages. However, they can be risky because the market fluctuates often. If you want to invest in lifestyle funds, make sure you know what they are and how much risk they carry before investing your money into them. Read more in detail here: lifestyle funds pros and cons.
Investment funds called lifestyle funds allocate assets based on an investor’s age, risk tolerance, and investment objectives. Consider lifestyle investing if you’re looking for a long-term, somewhat hands-off strategy to increase your money.
Depending on their degree of risk tolerance, the amount of risk required to meet their objectives, and their time horizon for investing, investors may choose from a variety of lifestyle funds. Also often seen in various retirement account types, such as employer-sponsored retirement plans and Individual Retirement Accounts, are lifestyle assets (IRAs).
Depending on your investment goals, level of tolerance with risk, and time horizon, you may want to consider if being a lifestyle investor makes sense for you.
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The Function of Lifestyle Funds
A combination of assets that match an investor’s objectives and risk tolerance make up a lifestyle fund or lifestyle investment. To provide investors a more straightforward way to accomplish their objectives, these investment funds customize their investment mix to each investor’s requirements and age.
Equities (i.e., stocks) and fixed-income assets (i.e., bonds and notes) are both acceptable investment options for lifestyle funds. These funds could need the asset owner to make fewer choices since they adapt automatically to changing lifestyle requirements till retirement. The balance between risk and return must be taken into account while investing in lifestyle assets, just as with other kinds of money.
Investors may get larger returns from lifestyle funds with a higher level of risk than they may from funds with a lower level of risk.
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The Function of Lifestyle Funds
The way lifestyle funds function is by building a diversified portfolio to meet an investor where they are while also taking into consideration where they’d want to be in 10, 20, or 30 years, and they are often acquired via a retirement account or a brokerage account.
An investor may choose from a starting allocation for a lifestyle fund and then change the risk level up or down in accordance with their own preferences. To assist an investor in staying on track with their objectives, a fund manager evaluates the asset allocation for the fund and rebalances it from time to time.
The amount of risk an investor is willing to accept may be related to their retirement age, which is typically about 65. A 25-year-old may now afford to take greater risk in order to accomplish their ambitions since they have 40 years to invest for the future. Their risk tolerance may decline as people age, which might result in a shift away from equities and toward fixed-income assets.
The amount of risk in lifestyle funds doesn’t fluctuate considerably over time, in contrast to target-date funds. Therefore, if you choose to invest in an aggressive lifestyle fund at age 25, its asset allocation would mostly remain the same by age 65. This is crucial knowledge to have when selecting the lifestyle fund that best suits your objectives and risk tolerance.
Recommendation: Age-Based Asset Allocation Detailed
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Funds for a Lifestyle in Two Stages
Depending on where you are in your investment path, lifestyle investing might be effective at various phases. Lifestyle funds adapt their asset allocation to fit these various phases.
This is something the fund manager can do to ensure that you’re working toward your goals without overexposing yourself to risk along the way. The Funds for a Lifestyle in Two Stages are the growth stage and the retirement target date stage.
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Growing Stage 1
A lifestyle investor is in the growth stage when they are actively saving and investing. The goal of investing diversification throughout the growth stage is to strike the right balance between risk and profit. As most individuals transition from the start of their professions to when they achieve their peak earnings, this stage constitutes the majority of their working years.
The asset allocation of lifestyle funds throughout the growth stage reflects the investor’s objectives and risk tolerance. Again, it depends on the individual investor whether this is more cautious, aggressive, or something in between. Rather of making withdrawals at this time, the investor is normally focused on funding retirement funds.
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2. Target Retirement Date
An investor’s countdown to retirement officially starts at the retirement goal date stage. Instead of making fresh investments or contributions, the emphasis now is on getting the investor ready to start collecting income from their portfolio.
A lifestyle investor may now have to choose whether they want to keep their current asset allocation, move part or all of their assets into other investments (like an annuity), or start taking cash withdrawals from them.
Depending on their goals, projected retirement date, and level of risk tolerance, an investor in their mid-50s could elect to switch from an aggressive lifestyle fund to a moderate or conservative lifestyle fund.
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Various Lifestyle Fund Types
Investors have a variety of possibilities to pick from, since lifestyle funds are not all created equal. There are several methods to organize lifestyle funds, including:
- income-oriented investments. The primary objective of these lifestyle funds is to provide income for investors, however capital growth may be a secondary objective. Although some equity assets may still be included, the majority of lifestyle income funds are often made up of fixed-income instruments.
- growth-oriented investments. The antithesis of lifestyle income funds are lifestyle growth funds. Less focus is placed on current income and more on long-term capital growth in these products.
- funds with a conservative asset allocation. Long-term objectives for conservative lifestyle funds may include obtaining a predetermined total return via both capital growth and current income. In comparison to other lifestyle funds, these funds often have lower levels of risk.
- funds with a moderate asset allocation. In terms of risk and return, moderate lifestyle funds often adopt a middle ground approach. The “fund of funds” method, which is largely used by these funds, is investing in other mutual funds.
- funds with aggressive asset allocation. A “fund of funds” strategy may also be used by aggressive lifestyle funds, but with a somewhat different aim. These funds take on more risk, but since they aim for long-term capital growth, the returns might be bigger.
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Investing in a Lifestyle: Risks
Make sure the fund you choose fits your level of risk tolerance since investing for retirement with lifestyle assets has certain hazards. The level of risk that an investor feels comfortable handling in their portfolio is referred to as risk tolerance. Risk capacity is the level of risk required to meet investment objectives.
In the beginning of their investing careers, young investors can often afford to take more risk since they have more time to recover from market falls. However, if the investor has a poor tolerance for risk, they can decide to stay with more cautious choices. They may fall far short of their financial objectives if their risk tolerance is out of line with the level of risk they must accept.
It’s crucial to take your risk level and risk mix into account when looking at lifestyle funds. While lifestyle funds make investing easier by removing the necessity for daily trading choices, it’s still necessary to take into account how your risk capacity and tolerance may change over time.
You may need to change your lifestyle fund selections as you go from the development stage to the retirement target date stage, for example, in order to stay up with your intended objectives.
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Gains from Lifestyle Funds
Lifestyle funds provide several benefits to investors in addition to dangers, beginning with simplicity. Based on the risk tolerance that you define, investing in a lifestyle fund gives you a general idea of what to anticipate in terms of asset allocation. You don’t have to be a hands-on investor to get rewards from these funds.
There isn’t much you need to do outside being aware of how the fund’s risk mix at any one moment represents your risk tolerance. Some funds also automatically rebalance on behalf of clients.
You may receive exposure to a range of assets with a lifestyle fund without having to buy specific stocks, bonds, or other instruments, thanks to the extensive diversification that it can provide.
The cost ratios of lifestyle funds may be lower than those of other mutual funds or exchange-traded funds (ETFs). This might eventually enable you to keep more of the investment returns.
Last but not least, lifestyle funds encourage investors to hold onto their investments despite market ups and downs. This might assist you in using dollar-cost averaging to balance out losses.
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Target date funds vs lifestyle funds
Target date funds are probably recognizable to you if you have a 401(k), since they are often provided in corporate retirement plans. A mutual fund called a target date fund, also known as a lifecycle fund, automatically modifies its asset allocation depending on the investor’s intended retirement date. These funds may be distinguished from lifestyle funds since their names often include a year.
As a result, a Target Date 2050 fund, for instance, would draw investors who want to retire in 2050. Additionally, target date funds have a diversified investment strategy, allocating money across equities and fixed-income instruments.
Target date funds follow a certain glide path, which is how they vary from lifestyle funds. The fund’s asset allocation changes to become more conservative as the participant approaches their desired retirement date. Instead, the asset allocation stays the same with lifestyle funds.
Recommendation: Key Differences Between Index Funds and Target-date Funds
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FAQ
A lifestyle pension fund is what?
Employees in a defined benefit plan, such as a pension fund, get retirement benefits based on their wages and service history. A lifestyle pension fund is a pension fund that uses a lifestyle approach to distribute assets in order to satisfy the objectives and demands of investors.
A lifestyle approach is what?
A lifestyle strategy is a method of investing that takes into account an investor’s age and risk tolerance while selecting assets that might assist them in achieving certain milestones or objectives. The asset allocation for lifestyle funds doesn’t significantly alter over time.
A lifestyle profile is what?
Based on their age, risk tolerance, and investment objectives, investors may choose the best lifestyle funds by using a lifestyle profile as a tool.
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The Lesson
The most crucial thing is to start saving for retirement, regardless of whether you decide to invest with lifestyle funds, target date funds, or anything else. The more time you have before retirement, the longer your money will have to grow as a result of compound interest.
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AlertMe
“Lifestyle funds” are investments that are designed to help people maintain their standard of living in retirement. They can be used as a “cash lifestyle pension” or an annuity, which is a form of income.
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