What Are Retirement Income Funds? Do You Need One?
A retirement income fund is a type of mutual fund that acts as a pension fund for conservative investors. Retirement funds enable you to save and invest for your golden years of life. These funds offer a stable source of income for you in retirement in the form of annuities. A retirement fund is actively managed and offers a good level of diversification in mid and large cap stocks.
Retirement funds can give a stable rate of return which is why they are a preferred mode of saving for your old age. They are not as volatile as other forms of investments and at the same time, are able to outdo traditional products such as a certificate of deposit and a money market account.
Here are some things you need to know if you are thinking of investing in a retirement income fund:
How do retirement income funds work?
Retirement income funds function just like a mutual fund. These funds are actively managed, which implies that all decisions related to the investment are taken by the fund manager. While they are proclaimed to be safe, they too, are exposed to the risk and volatility of the market. This is why they do not provide guaranteed income in retirement and there may always be a certain degree of uncertainty attached to them.
What are the benefits of retirement income funds?
Retirement income funds offer many benefits, such as:
- Offers a regular source of income
Retirement income funds offer the security of a steady stream of funds in your retirement. This can be very beneficial at a time when you are not earning but still require adequate means to meet your daily needs and future goals, such as healthcare costs, bill payments, home repairs, etc. - Provides the option to choose monthly or lump sum annuity
Retirement income funds let you choose between monthly annuities or a lump sum payment. Based on your preference and your family’s need for liquidity, you can choose either of the two options. The former is a more suitable pick for people who may require an income over a period of time. This also eliminates the scope for overspending or wastage. However, if you are in dire need of immediate funds for a particular goal, you can opt for the lump sum option. - Allows you to diversify your portfolio
Retirement income funds offer a well-diversified group of options to investors. These funds involve mid and large cap stocks and bonds. Not only do they provide a decent rate of return but also the benefits of diversification with a balanced portfolio.
What are the different types of retirement income funds available in the market?
There are four fund companies that are offering retirement income funds in the market currently. These are:
- Vanguard Managed Pay out Funds
Vanguard’s Managed Payout Fund offers an annual distribution percentage of 4%, based on the popular 4% rule that states that retirees should aim at withdrawing only 4% of their savings in a year to avoid running out of funds in their lifetime. The fund invests in other Vanguard stocks and bonds and is suitable as a long-term investment. The minimum investment required to enroll is capped at $25,000, and the expense ratio is fixed at 0.38%. - Schwab’s Monthly Income Funds
Charles Schwab’s Monthly Income Funds offer three funds – Moderate Payout fund, Maximum Payout fund, and Enhanced Payout fund. The minimum investment required for each of these funds is only $100, making it an ideal cost-effective option for most people. The expense ratios for the funds are fixed between 0.47% and 0.66%. There are no hidden sales fees charged on these funds. The annual distribution rate for the Moderate Payout fund is 3%, the annual distribution rate for Maximum Payout fund is 5%, and the annual distribution rate for Enhanced Payout fund is 4%. - Fidelity’s Income Replacement Funds
The minimum investment for Fidelity Income Replacement Funds is $25,000 with an expense ratio between 0.50% and 0.70%. The fund operates like an annuity and provides a monthly payment to investors. However, the fund comes with an added benefit of allowing you to withdraw your investment at any given amount of time as you require, unlike an annuity where the payments are fixed as per a schedule. - John Hancock’s Retirement Living Funds
The John Hancock Retirement Living fund invests your money in several other stocks and bonds, following the principle of fund of funds. Just like Vanguard’s Managed Payout Fund, the John Hancock fund is also suitable as a long-term investment as the chances of earning high profits is relatively more over a long span of time. Treating this is as a short-term investment and pulling out before the intended time can bring in losses or a lower rate of return than expected.
Should you invest in a retirement income fund?
These funds are a perfect balance of good returns and a low level of risk. As mentioned above, they can give out better profits than conservative products such as CDs and money market accounts. This can help you earn more, and at the same time offer you security in retirement. These funds are actively managed, so most decisions are taken by the fund manager. The fund allocation too, is changed from time to time to bring in the most desired results. This is a viable option if you are looking for conservative investments but do not want to compromise on returns entirely.
To sum it up
Retirement income funds can provide you with a dependable income in your golden years. However, since these funds offer gains over a period of time, it is important to invest in them at the right phase in your life. The four funds stated above provide great options for investors of all ages and income backgrounds. You can get in touch with a financial advisor in your area to know which of these are suitable for your risk appetite and investment goals.
