The good life

When planning for retirement, selecting the appropriate investment vehicle is crucial. Two popular options often considered are lifecycle funds and balanced funds. This article will delve into the key differences between these two types of funds.

Lifecycle Funds

What are lifecycle funds? Lifecycle funds, also known as target-date retirement funds or age-based funds, are all-in-one investment options that can simplify retirement planning. They offer a diversified portfolio with an asset allocation that automatically adjusts based on your expected retirement year.

How do they work? As you approach your retirement date, the fund gradually shifts towards a more conservative mix of investments, typically increasing the proportion of bonds and other fixed-income securities. In other words, it goes from high risk for better growth to low risk and stability as you get closer to retirement. This helps to mitigate risk and protect your retirement savings.

Key benefits of lifecycle funds:

• Simplicity: The fund’s managers automatically adjust the asset allocation over time, reducing the need for investors to monitor their investments and make adjustments.
• Diversification: Lifecycle funds provide a well-balanced portfolio across different asset classes.
• Target-date focus: The product is aligned with your retirement goals. If you’re planning to retire in a specific year, the fund will adjust accordingly to minimize investment risk as you get closer to retirement.

The downsides to lifecycle funds:

• One-size-fits-all approach: The predetermined asset allocation strategy makes for a rather inflexible product that might not fit your risk appetite
• More expensive: Management fees of lifecycle funds are typically more expensive
• It’s passive: For some, this might mean one less thing to worry about. Set it up and step away. However, this might breed a bad habit of completely stepping away and not keeping an eye on your retirement readiness. If you’re a regular reader of this blog, you’ll know that we frequently highlight the importance of reviewing your retirement savings regularly to see whether you’re on track.

Balanced Funds

What are balanced funds? Balanced funds are mutual funds that invest in both stocks and bonds. They aim to provide a blend of capital growth and income generation. They’re basically all about long-term growth.

How do they work? Stocks offer the potential for growth, while bonds provide a steady income stream. The specific allocation to stocks and bonds varies depending on the fund’s investment strategy, but they typically allocate between 50% and 70% of their portfolio to stocks, with the remaining portion invested in bonds.

Key benefits of balanced funds:

• Diversification: Reduces risk by investing in more than one asset class.
• Income generation: Provides a regular income stream.
• Growth potential: Can generate returns in line with market growth.

Choosing Between Lifecycle Funds and Balanced Funds

A 2017 study published in the South African Journal of Economic and Management Sciences found that whether one fund outperforms the other depends on how the funds invest their money, how long they shift from risky to safe investments, and the overall market conditions.

So the best option for investors really just depends on their individual circumstances and risk tolerance. Here are some factors to consider:

• Investment experience: If you’re new to investing, lifecycle funds offer a convenient and hassle-free approach. But remember to check in regularly to see whether you’re on track.
• Moderate risk tolerance: If you just want to beat inflation and protect your savings, balanced funds may be more up your alley.
• Retirement goals: As always, consider your specific retirement needs and the level of income you’ll need for a comfy retirement.

Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, Carina Jooste responds to common retirement questions, ranging from which products are best suited to different circumstances to efficient tax treatments.