Retirement Income Funds

Retirement Planning

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One of the most important aspects of retirement planning is knowing how to find the best retirement income funds. But what exactly are retirement income mutual funds, and how can an investor find the best funds for their needs?

Here's what you need to know about investing in mutual funds in retirement.

Retirement Income Funds Definition

Retirement income mutual fund portfolios usually consist of a mix of stocks, bonds, and cash and are most appropriate for those investors already in or entering retirement. The objective of these portfolios is typically one of conservative asset allocation. These portfolios aim to provide investors with steady income throughout retirement.

How to Find the Best Retirement Income Mutual Funds

In general, the best retirement income funds have a fundamental objective that balances preservation of assets, income, and growth, prioritized in that order. For example, the highest priority is to achieve positive returns (above zero percent); the second priority is to achieve returns at or above inflation; and the lowest priority, which is not really a "goal," is to grow the assets. This is because growth significantly above the rate of inflation would require too much exposure to market risk, which increases the odds of loss of principal.

In simple terms, you want to look for retirement income funds that have average annualized returns of 3.00% to 4.00%. Also be sure to focus more on the five-year and 10-year returns for the fund and give less attention to short-term performance.

You also want to look for the best no-load funds with low expense ratios. You need to keep every penny possible for your retirement income.

Best Retirement Income Fund Examples

To perform our search for the best retirement income funds, we used Morningstar's Principia Pro software, but you can use any of our recommended sites to research mutual funds.

Including all share class types, we found more than 300 retirement income funds. To narrow our search, we excluded all front-load and back-load funds, all funds with 12b-1 fees and all funds with expense ratios above 0.50%. This narrowed the selection down to just 15 mutual funds. Of those funds, we selected one with a moderate asset allocation and one with a conservative allocation.

The Vanguard Managed Payout Distribution Focus Fund Investor Shares (VDPFX) 

VDPFX is one of three mutual funds that Vanguard calls their "Payout Funds," which are "intended to supplement an investor’s retirement income by paying different levels of monthly distributions (or payouts)."

Although VPDFX has a moderate-risk allocation (approximately 70 percent stocks, 30 percent bonds, cash and "other," according to Morningstar), it does have the most conservative asset allocation and the highest monthly payout rate of the three Vanguard payout funds. The fund's primary objective is to balance the preservation of principal with income that is appropriate for retirement. The moderate allocation may be a bit of a bumpy ride, in terms of volatility, for some investors but its long-term performance potential is greater than that of the more conservative retirement income funds. A diversified mix of Vanguard index funds is likely to attract many retirees already inclined to use Vanguard and/or index funds.

The Fidelity Freedom Income Fund (FFFAX)

FFFAX is more conservative than the Vanguard Managed Payout Fund with a portfolio of underlying Fidelity mutual funds that, according to Fidelity, seeks to maintain stable asset allocation, including diverse categories, such as U.S. stock funds, international stock funds, and a range of bond funds.

FFFAX is one of the oldest retirement income funds and has historically produced returns ranging between 4 percent and 5 percent, which is a good target for remaining ahead of inflation while keeping risk low.

Of course, past performance is no guarantee of future results but when you reduce or eliminate drags on performance, such as loads, fees, and high expenses, you can at least give your retirement income a greater chance of lasting longer than you.

Disclaimer: The information on this site is provided for discussion purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.