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Lifestyle Funds: Designed for the Tests of Time

Wouldn’t it be great if there were investment options designed with your exact needs in mind that allowed you to stay focused on building financial security for retirement?

Actually, such investments do exist. They’re called lifestyle funds, and they may be available through your employer-sponsored retirement plan. Lifecycle funds, also known as target-date funds, are funds of funds that change the makeup of their portfolios over time in an attempt to meet goals you plan to reach at a specific time, such as retirement.

What’s the Appeal?

One of the uncertainties facing retirement plan investors is whether market volatility will have a negative influence on their ability to accumulate enough money to retire on schedule and in comfort. But while it’s impossible to eliminate volatility altogether, there are strategies you can follow - such as investing in a lifestyle fund - that may help you stay focused and on the right track regardless of the market’s ups and downs.

Here’s how they work: Typically, target-date funds are usually sold by a specific date, such as a 2025 fund. Instead of investing exclusively in stocks, bonds or cash, lifestyle funds invest in a mix of securities from multiple asset categories. In theory, that strategy allows a fund’s management to pursue the best possible returns while maintaining a predetermined level of risk. The farther away the redemption date is, the greater the risks the fund usually takes. As an example, a fund may contain a portfolio mix of equity, debt (fixed income) and cash equivalent investments with equities making up the largest portion of the portfolio. However, as the target date approaches, the fund will change its balance of investments to add more debt to emphasize conserving the value it has built up and to shift toward income-producing investments.

Financial Focus

Each individual lifestyle fund is designed to address the needs of particular types of investors, typically those who want to address age-based risk tolerance considerations. For example, there are lifestyle funds available for conservative investors, aggressive investors and those in between.

An older worker approaching retirement may want to consider a conservative fund, in which exposure to risk is more limited. On the other hand, younger workers with more time to "ride out" market volatility may choose a more aggressive fund, which may be more volatile in the short term but may offer the potential for higher long-term returns.

To choose a suitable lifestyle fund for your needs, first determine the mix of investments that makes the most sense in light of your unique situation. Then you can select the fund that best complements your objectives.

Investments in target date funds are subject to the risks of their underlying investment holdings via their time in and volatility of the financial markets, issuer default, credit, inflation and interest rate risks. This effect is usually pronounced for longer term securities. Principal invested is not guaranteed at any time, including at or after retirement. The year in the fund name refers to the approximate year when an investor in the fund would retire and leave the work force.

Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus contains this and other information about the investment company. You can obtain a prospectus from your financial representative. Read carefully before investing.

© 2010 Standard & Poor’s Financial Communications. All rights reserved.