Retirement Income Funds and How They Work

Introduction

Retirement income funds provide a comprehensive solution for obtaining monthly income. These funds offer a one-stop investment management solution, providing more flexibility (but fewer guarantees) than annuities.

Vanguard Retirement Income Management Funds

Vanguard had three funds designed to provide monthly income with the single goal of preserving or increasing your original investment, but in January 2014 these funds were merged into a single fund targeting an annual distribution rate of 4%. The fund is invested using the concept of a “fund of funds”, where your money is distributed across many other Vanguard equity and bond funds, with the allocation adjusted at the discretion of the fund manager. If necessary, the principal may be used to meet the target distribution amount. This strategy should be used when you are willing to give the fund a long time to achieve its goal. If you withdraw excess funds when the fund is experiencing a period of poor returns, you are unlikely to get the long-term results that the fund was designed to provide for you. Income and capital are not guaranteed. The fund has a target distribution rate, but the distribution is not the same as the rate of return, as part of the money paid may be return of capital.

Fidelity Income Replacement Funds

Fidelity has a series of income replacement funds designed to provide monthly income by paying out capital and earnings over a specified period, functioning similarly to annuities. A good feature: the monthly income is designed to keep pace with inflation, and unlike annuities, you can change your mind and withdraw your investment at any time. The funds meet their goal by gradually liquidating your investment and paying your balance in full by the target date of the fund. Depending on how long you want your money to last, you can choose a fund that will have paid out 100% of your balance by a specific year such as 2020, 2030, or 2042. The longer the duration you choose, the greater the amount you will receive monthly. The investment mix in each fund will automatically change over time, becoming more conservative as you approach the fund’s end date. Income and capital are not guaranteed.

Schwab Monthly Income Funds

Charles Schwab offers three funds in its series of monthly income funds, each requiring a minimum investment of $100 (although $100 will not provide much monthly income). The funds have reasonable expense ratios ranging from 0.47% – 0.66%, and there are no sales loads or 12b1 surrender fees. The funds have a target distribution amount ranging from 1-8% depending on the fund and the current interest rate environment. The funds are named “Moderate Payout”, “Enhanced Payout”, and “Maximum Payout”. The Moderate Payout fund can have up to 60% of the fund in equities, while the Maximum Payout fund can have up to 25% in equities. During periods of low interest, these funds will choose to reduce the distribution before tapping into capital. This means that monthly income may vary.

John Hancock Retirement Living Funds

John Hancock offers a series of retirement living funds, designed to manage investments towards retirement in a specific year. The funds aim to maximize returns up to the targeted retirement year, and after the target date, the focus shifts to generating more current income. The funds achieve this using the concept of a “fund of funds”, where your money is distributed across many other equity and bond funds, with the allocation adjusted at the discretion of the fund manager. Distribution amounts and capital are not guaranteed. The strategy used in these funds has the highest likelihood of long-term success. If you withdraw your money when the fund is going through a negative return period (which will happen to all funds at some point), you are unlikely to achieve the results the fund aims to deliver for you. John Hancock’s retirement living funds have expenses exceeding 1% annually, which is higher than similar alternative funds. Each of the funds in the retirement living series has a different target date ranging from 2010 to 2060. Most funds require an initial investment of at least $1,000 for classes A, B, and C. There may be no minimum for some classes of shares offered through a group retirement plan. You can find additional information about the funds by searching the John Hancock website under the asset distribution category for the funds.

Source:

https://www.thebalancemoney.com/retirement-income-fund-reviews-2388688