One of the most important aspects of retirement planning is knowing how to find the best retirement income funds. But what exactly makes the best income funds for retirement, and how should investors choose the right funds for their needs? We break down what you need to know about investing in mutual funds in retirement.

Key Takeaways

  • The primary objective of income funds is to provide steady income, which may include dividend income from stocks, or fixed income from bonds.
  • There are two main types of retirement income funds: balanced funds and target-date retirement funds.
  • Balanced funds maintain a fixed allocation of stocks and bonds, while target-date funds have an allocation that becomes more conservative over time.
  • When choosing the best funds for retirement, its wise to keep expenses low, which can help to boost performance and keep more of the yield.

Retirement Income Funds Definition

Retirement income funds are portfolios typically consisting of a conservative asset allocation of of stocks, bonds, and cash and are most appropriate for investors who are already retired or nearing retirement age. The primary objective of income funds is to provide investors with steady income that may include dividend income from stocks, or fixed income from bonds.

In addition to providing a source of income, the best retirement income funds often seek to balance three broader objectives: preservation of assets, income, and growth. 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 third priority is to grow the assets.

Types of Retirement Income Funds

There are several types of funds that investors can use to generate income in retirement. These may include dividend stock funds, bond funds, or hybrid funds that invest in a combination of stocks and bonds. However, there are two main types of retirement income funds: balanced funds and target-date retirement funds.

  • Balanced Funds: These retirement income funds typically maintain a relatively fixed allocation of stocks and bonds. The allocation is typically a conservative mix of about 20% to 40% dividend stocks, and 60% to 80% bonds.
  • Target-Date Retirement Funds: These retirement income funds will have an allocation that gradually becomes more conservative as time passes. For example, a retired person may buy a target-date retirement 2020 fund that is appropriate for someone retiring in this decade. The allocation will have some stocks but will be tilted toward bonds, and it will become increasingly allocated to bonds as time passes.

The Best Retirement Income Funds

When searching for the best retirement income funds, its wise to seek an allocation that suits your risk tolerance, as well as your need for income and growth. To narrow down our list to just a few retirement income funds, we included only no-load funds with low expense ratios. Then we screened for funds that are specifically designed for retirement income.

Here are some of the best income funds for retirement that we found:

  • Vanguard LifeStrategy Income Fund (VASIX): This fund offers investors a diversified mix of Vanguard index funds that is designed to be a complete portfolio in just one fund. VASIX is likely to attract retirees who are already inclined to use Vanguards low-cost, passively managed index funds. The asset allocation is a conservative mix of about 20% stocks and 80% bonds. The expense ratio is just 0.11%.
  • The Fidelity Freedom Income Fund (FFFAX): This fund is another conservative retirement income fund that maintains a relatively fixed allocation of about 20% stocks and 80% bonds. The objective of the fund is to seek high current income while also seeking to provide capital appreciation. The expense ratio for FFFAX is 0.47%.
  • Fidelity Capital & Income Fund (FAGIX): Retired investors who can tolerate higher market risk, in exchange for higher potential yield and growth, may want to consider FAGIX. To get the exceptional yield of 4.95%, the fund portfolio consists mostly of investment-grade or lower-credit-quality high-yield bonds. While this allocation increases risk, the yields are consistently higher than mutual funds that invest in higher-quality bonds, such as U.S. Treasuries. The expenses are also a bit higher at 0.69% but still low for a well-managed mutual fund.
  • Vanguard Target Retirement 2020 Fund (VTWNX): This fund is designed for recently, or soon-to-be, retired investors (between the years 2018 and 2022). The current allocation is about 50% stocks and 50% bonds, which can provide a balance of income and growth. Since its a target-date mutual fund, VTWNX will grow more conservative over time. The expense ratio for VTWNX is 0.13%.

Bottom Line

Retirement income funds can be smart investment options for retirees who prefer to invest in a managed portfolio of stocks and bonds rather than selecting the funds and managing the assets themselves. When choosing the best funds for retirement, its generally wise to keep expenses low, which can help to boost performance and keep more of the yield you are seeking for income.

The Balance does not provide tax, investment, or financial services or advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.

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