Today, and for every day for the next 10 years, 10,000 baby boomers will turn 65, fueling huge demand for retirement income. While Social Security is a start, many retirees have investment assets to liquidate and spend in retirement. Yet, how much to withdraw in retirement remains a problem. The 4% rule popularized in the 1980’s isn’t a sure thing.
That’s where retirement income funds might help. These investments emerged around the same time as target date investment funds did.
The premise is simple: invest in a professionally managed retirement income fund, and build income to either save for retirement or to spend after you’ve left the workforce. The fund provider might send you a monthly check or just conservatively manage your assets for income and growth.
Retirement income funds are typically actively managed mutual funds that lean toward a conservative asset allocation. The funds charge a management expense ratio, typically less than 1%. These investments can be useful for retirees seeking professional money management for less than the cost of a traditional financial advisor.
Retirement Income Fund Details
Retirement income funds are not all alike. Income replacement funds, which are similar to reverse target-date funds gradually return your money, plus any income and capital gains until the funds are liquidated in a predetermined year.
Then there are managed payout funds, that strive to give retirees equal monthly payouts, for a predictable cash flow. The Vanguard Managed Payout Fund Investor Shares (NASDAQ:VPGDX) attempts to disperse 4% annually. Currently, Vanguard estimates that a $100,000 investment would generate $313 monthly, or 3.76%. The fund charges a 0.32% management fee.
Other retirement income funds include the Fidelity Freedom Income Fund (NASDAQ:FFFAX), JPMorgan SmartRetirement Income Fund Class I (NASDAQ:JSRSX), BlackRock LifePath Index Retirement Fund Investor A Shares (NASDAQ:LIRAX), T. Rowe Price Retirement Balanced Fund Class R (NASDAQ:RRTIX) and a swath of Schwab retirement income funds including the Schwab Monthly Income Fund – Enhanced Payout (NASDAQ:SWKRX).
Unlike an annuity, retirement income funds don’t guarantee a specific payout. Each fund will choose its own asset mix and investment methodology. Returns and payout amounts also vary.
Advantages of Retirement Income Funds
These funds are professionally managed and rebalanced, saving the investor from investment management during retirement.
For the managed payout retirement income funds, the investment firm distributes cash for living expenses. This saves you the anxiety of figuring out how much to withdraw and from which accounts to take. There are even IRA retirement income funds to help with retired minimum withdrawal computations such as Fidelity’s Simplicity RMD funds.
Disadvantages of Retirement Income Funds
The management expense ratio is a consideration. While less than the fees of a typical financial planner, retirement income funds usually charge more than a low-fee index fund.
The asset allocation may not be right for you. If you’re a conservative investor, some retirement income funds might be weighted too heavily towards stock investments, and vice versa.
Retirement income funds don’t replace the financial advice you might need in your later years to help with tax, financial and estate planning. That’s where a human financial advisor can be helpful.
At the outset, you’ll still need to research the funds to find the one that works for you.
If retirement income funds aren’t for you then you might consider investing on your own and setting up a withdrawal plan.
Another alternative to retirement income funds might be a low fee robo-advisor with a conservative income portfolio option. Betterment, M1 Finance and Wealthfront robo-advisors can handle the investment rebalancing and portfolio management, while you decide upon a withdrawal strategy. For the cost conscious, M1 Finance doesn’t charge any management or transaction fees. While both Betterment and Wealthfront levy a low 0.25% management fee with no additional transaction or trading fees.
Ultimately, retirement income funds are one solution to the question of how to disburse funds during retirement. When exploring retirement income funds take into consideration your own temperament, abilities, and investment preferences.
Barbara A. Friedberg, MBA, MS is a veteran portfolio manager, expert investor, and former university finance instructor. She is editor/author of Personal Finance; An Encyclopedia of Modern Money Management and two additional money books. She is CEO of Robo-Advisor Pros.com, a robo-advisor review and information website. Additionally, Friedberg is publisher of the well-regarded investment website Barbara Friedberg Personal Finance.com. Follow her on twitter @barbfriedberg and @roboadvisorpros. As of this writing, she does not hold a position in any of the aforementioned securities.