Mutual Funds You Can Retire On
Starting in 2007, the number of Americans of retirement age (65 and older) began growing faster than the population in the prime saving and investing years (40-60).
This generational shift will make a profound impact on the stock and bond markets. Stocks overall will likely notch lower returns than we saw in the 1980s and 1990s, at least through the end of the decade (2018-2020). At the same time, dividend-paying stocks will sparkle, driven up by income-seeking retirees.
Bond yields also will remain lower than many gurus now assume. Reason: Retirees, with their conservative mindset, will turn to bonds for a cushion against stock market volatility. Bonds also allow the income seeker to capture higher cash yields than those afforded by money market funds and short-term bank deposits.
I’d like to take some time now to address the mutual fund investors among us who may be near or in retirement. Do you own the appropriate funds?
Answering that question takes a little thought. Not all retirees are in same financial situation. Some can accept greater month-to-month (and even year-to-year) fluctuations in their portfolios than others can.
Some need to earn more income from their investments than others do. Ultimately, these issues are more important than whether you own funds from Fidelity, Vanguard or some other family.
Since one size doesn’t fit all, I suggest that you begin with basic model portfolio allocation (70% stocks, 30% fixed income) and make the necessary tweaks to fit your own circumstances. As a broad guideline, I recommend that you:
- Add 1% in equities for every year you’re under age 57,
- Add 1% in equities for every $200,000 in your portfolio value above $1 million; and
- Subtract 1% from your stocks for every year over age 70, then an additional 2% for every year over 80.
Once you’ve found the allocation that fits you best, you can go on to consider the most appropriate mutual funds for your situation. As a thrifty Yankee, I prefer no-load (no sales charge) funds. Over the long pull, when you adjust for sales charges, no-load funds generally outperform their “loaded” brethren.
Cash You Can Never Outlive
Annuities are an age-old concept. Most investors nowadays buy the deferred version of the product. With a deferred annuity, you put money in and the annuity’s earnings accumulate tax-free until you begin making withdrawals.
For a different twist, I suggest that retirees consider an immediate annuity. You deposit a lump sum, and the insurance company starts cutting you monthly checks immediately — for life.
What’s the benefit of immediate annuitization? For starters, assuming you’ve chosen a fixed annuity, you know exactly what dollar amount you’ll receive and for how long. You can never outlive the cash. No dividend cuts to worry about, either. As long as the insurer remains solvent, your checks can’t be reduced. Even if the insurance company goes belly-up, all 50 states and the District of Columbia sponsor guaranty associations that generally pick up the tab.
Another handy feature: Part of each monthly payment is treated as a tax-free return of capital.
Of course, there are caveats. When you die, the annuity payments cease. Your heirs get nothing, unless you specify that the annuity is to continue for a minimum number of years. The trade-off, if you select the “life with term certain” option, is that you receive smaller checks and the tax-free portion shrinks.
Unless you’ve got no heirs to provide for, I strongly recommend life with term certain.
What to do now: To maximize your annuity income, I suggest creating a “ladder” of multiple annuities, some with longer and some with shorter guarantee periods. (The shorter pay more, naturally.)
For a higher yield, you might also steer a portion of your annuity money to a fraternal or religious organization. As long as the organization belongs to a state guaranty association (a fact you should confirm in writing), you’ll enjoy the same protection against default as you would with a commercial insurer.
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