Best Retirement Income Mutual Funds

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Retirement income mutual funds have a fundamental objective that balances preservation of assets, income, and growth. Therefore the highest priority for a retirement income portfolio is not to deliver a high yield but to achieve positive returns that are equal to or slightly higher than inflation. This not only preserves principal but also preserves buying power for the retiree as the cost of living rises.

retirement-pollAlso, retirement income portfolios will often have withdrawal rates higher than the average yield, especially in today’s low-yield environment. For most retirees, a general rule for withdrawal rate is to start at 4% and then increase that amount by 3% per year. These percentages are statistically shown to have a high probability that the portfolio will keep pace with inflation and provide steady income for up to 30 years.

For example, a $1 million beginning balance in retirement would have a first-year withdrawal rate of $40,000 ($1 million x 4%), the second year’s total withdrawal would be $41,200 ($40,000 + 3%), and so on.

With this in mind, here are the top 3 retirement income mutual funds that have solid risk/return profiles sufficient to meet the long-term income needs of the retired investor.

Vanguard Managed Payout Investor (VPGDX)

retirement income mutual fundsVanguard Managed Payout Investor (VPGDX) is a “Payout Fund,” which is designed to supplement an investor’s retirement income by paying monthly distributions (or “payouts”). The primary objective of the fund, according to its prospectus, is “to make monthly cash distributions while seeking to have these distributions and the invested capital keep pace with inflation over time.”

But don’t confuse payout funds with annuities. While management will adjust monthly payouts based upon market expectations (the current payout is set at an annual 4% rate), there is still principal risk, which can reduce the monthly distribution amount in down markets. With a relatively aggressive stock allocation of nearly 75%, the Managed Payout fund can stand the test of time and inflation. However, this allocation may not be suitable for the more conservative retirement income investor.

VPGDX has a 5-year return of 10.8%, which ranks ahead of 98% of other fund’s in its category, but the inception date is May of 2008; therefore it has not been truly tested in a full bear market.

The expense ratio is only 0.34%, and the minimum initial purchase amount is $25,000.

T. Rowe Price Target Retirement Income (TRRIX)

T. Rowe Price Target Retirement Income (TRRIX) is a portfolio consisting of 16 T. Rowe Price mutual funds, which makes it a “fund of funds” that conveniently diversifies assets designed for retirement income.

retirement income mutual fundsThe fund’s 10-year annualized return of 6.1% places it ahead of 95% of category peers. Combined with a moderate allocation of approximately 40% stocks, 55% bonds, and 5% cash, TRRIX demonstrates a balance of risk and return suitable for any retiree, with exception of the ultra-conservative, risk averse investor.

The low 0.57% expense ratio won’t be too burdensome on income or long-term returns and the $2500 minimum initial purchase makes the T. Rowe Price Target Retirement fund accessible to a broad set of retirement income investors.

Fidelity Freedom Income (FFFAX)

Fidelity Freedom Income (FFFAX) likely won’t ever win the total return competition among retirement income funds, but it has an outstanding record of producing sufficient returns with a conservative portfolio.

retirement income mutual fundsThe 10-year annualized return of 4.4% provides the needed growth for income distribution and preservation of principle with a low-risk, low-volatility asset mix, which was recently at approximately 25% stocks, 60% bonds, and 15% cash. One caveat is the manager tenure of 3 years, but the fund’s conservative structure and Fidelity’s deep research tradition remains in tact.

The expense ratio is a cheap at 0.49%, and the initial investment minimum is just $2500.

As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/retirement-income-mutual-funds/.

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