Income Funds

During the course of previous discussions, we have identified three general stages in an individual’s investment life-cycle: building a fiscal foundation (conducted during your 20s and 30s), accumulating wealth (occurring between the early 40s and mid-50s), and pre-retirement, the five-year period prior to your desired retirement age. During the pre-retirement stage, debt is eliminated and a plan – considering the withdrawal rate (e.g. the 4% rule) and the order of withdrawal from the various retirement accounts – to draw down the retirement nest-egg is developed.

With a sufficient nest-egg in place, debt eliminated, and an understanding that the nest-egg has to be drawn down in a manner to ensure that it will last 30+ years if necessary, the question then becomes, “how can I turn my retirement savings into a reliable retirement income and what type of investments should be held during the retirement period?”

One potential option are income funds. These types of funds are geared toward individuals already in or entering retirement. As the name suggests, an income fund is a type of mutual fund that emphasizes current income, either on a monthly or quarterly basis.

Develop Your Withdrawal Plan [RetirementSavvy]

Unlike growth funds, which focus more on capital appreciation – normally accompanied by above-average risk and volatility – income funds tend to utilize a more conservative asset allocation strategy. These funds attempt to meet the objective of providing steady income throughout retirement by holding some combination of government, municipal, and corporate debt obligations, preferred stock, money market instruments, and dividend-paying stocks.

As with any mutual fund, a thorough reading of the prospectus should take place before deciding on a particular fund(s). Key factors to consider include ensuring that there is no load associated with the fund and the expense ratio is less than 1%.

In a later SavvyDiscussion, we will look at annuities as options for reliable retirement income.

James
 

James retired in 2005 after serving 21 years in the United States Army. During the latter part of his career, James' interest in personal finance was piqued based on his own experiences and observations of the way most Americans plan – or more accurately, fail to plan – for retirement and the difficulty many face in starting the process. His most valued education has been lessons learned from personal experience and through conversations with smart, savvy friends.

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