Insurance products are not the only financial vehicles that set confusion wheels a-spinning. So do retirement-minded mutual funds that have names like lifecycle, target date, retirement date, retirement income and payout mutual funds.
In general, these products manage asset class mixes in a way that makes the portfolio progressively more conservative over time, or that enables the investor to move easily into increasingly conservative funds in a fund family as retirement nears.
The funds are part of the burst of products that have been unveiled, all seeking to help the older set with their retirement financials. As such, they are welcome additions to the tried-and-true funds of yesteryear–stock, bond, etc.
But it’s tricky figuring out how these new products differ, and what to expect of them long term. Let’s unpack this.
Their genesis seems to be the “lifestyle” funds that, according to NU archives, first took wing in the late 1980s. The lifestyle funds offered premixed allocations and investment goals designed for various life stages, such as young professionals, families with young kids, and so on.
By the mid- to late-1990s, the “lifestyle” notion of matching allocations to needs and goals morphed–into “lifecycle” funds. These were funds-of-funds, typically offered inside of 401(k) plans. Then, as now, the providers promised to adapt investment strategy and choice according to a participant’s age and retirement goals.
Originally, the lifecycle and lifestyle funds seemed nearly the same; but their descriptions and positioning were not. The lifecycle funds aimed at correlating with stages in life, not style of life.
By the early 2000s, the lifecycle funds had developed discrete versions–the target- or retirement-date funds, and the target-risk funds. The former focus on automatic rebalancing to more conservative allocations as the specified retirement date draws near, while the later seek to align with the investor’s risk tolerance (conservative, aggressive, etc.), much as the lifestyle funds had done.
In recent months, the industry has morphed these concepts yet again–into “payout” or “retirement income” funds.