3 Tips for Finding the Best Retirement Mutual Funds

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The best retirement mutual funds are ones that are chosen because they meet your goals. You have to know how much income you need and when you need it. If you've established your goals, next, look for funds with low expenses, consider an auto-pilot solution, and determine what type of investment and withdrawal strategy you are going to use.

Look for Mutual Funds With Low Fees

With over 11,000 mutual funds on the market, it can be difficult to figure out which ones are appropriate to use in retirement. One important thing to look at is the internal cost of the mutual fund, which is called an expense ratio.

Suppose you invest $100,000 in a mutual fund that has expenses of 1% a year, or $100,000 in a similar mutual fund that has expenses of .50% per year. With the second fund that has lower internal expenses, you have an extra $500 a year that comes back to you rather than being paid in fees. Over the course of a thirty-year retirement, that extra $500 a year adds up.

Afraid a retirement mutual fund with lower expenses won’t perform as well? Think again. Research shows lower expense funds often outperform their peers that have higher fees. For example, index funds are known to deliver solid performance with low fees. You can build a solid, low-cost retirement portfolio using funds index funds. Or you can look at a pre-packaged solution using a retirement income fund, described below.

Consider Retirement Income Funds

Many of the large mutual fund companies have put together a series of funds designed just for retirement. They are often referred to as retirement income funds. These retirement mutual funds are specifically designed and managed to deliver monthly retirement income to you.

If you want a retirement mutual fund that delivers a high level or monthly income, expect that over time your principal will stay flat or gradually go down. If you want a retirement mutual fund that will maintain its value, you’ll need to accept less income. Most retirement income funds are designed to pay out between 3% and 7% a year, so for every $100,000 invested, you can expect an annual income of $3,000 to $7,000 a year. 

Retirement income mutual funds are different than dividend income funds, which are another option. A retirement income fund will manage a portfolio of both stocks and bonds designed to offer a trade-off between capital preservation and monthly income. A dividend income fund owns stocks or preferred stocks that pay dividends. A retirement income fund can generally serve as a complete portfolio for you, whereas a dividend income fund would be one building block of a retirement portfolio.

Follow a Defined Investment Strategy for Retirement

One big mistake both retirees and financial advisors make is thinking that in retirement when they are withdrawing money, they can manage their mutual funds the same way they did when they were working and saving and investing. Retirement investing needs to be done differently.

In retirement, a thoughtful process needs to be applied to which accounts you will need to withdraw from in which years, and you need to make sure that you will never be in a situation where you may be forced to sell a retirement mutual fund in a down market.

  • One option is to use a well-documented set of withdrawal rate rules to manage a portfolio of retirement mutual funds.
  • Another option is to think of your funds in terms of time segments – investing the money you need in the next five years differently from the money you won’t need for at least fifteen years.
  • Another option is to work with an experienced retirement planner who understands that investing for income takes a different approach.

The best mutual funds for retirement are the ones that have low expenses and have been chosen after you made a detailed retirement income plan. Many upcoming retirees spend far too much time trying to find the best retirement mutual funds, and far too little time on planning decisions such as tax planning, when to take Social Security, or how to take their pension income.

When these other decisions are made appropriately they can often deliver far more value than picking a mutual fund. Do your retirement planning first. The last piece of the planning process should be choosing retirement investments.