Ever hear of retirement income funds? You might soon, if you’re having trouble managing withdrawals from retirement funds. In a word, retirement income funds solve an age-old problem for retirees — how do you ensure you don’t run out of cash in your golden years?
In a nutshell, retirement income funds aid retirees in handling regular income withdrawals, whether for everyday living expenses or larger needs like vacation travel or helping out with family college costs. Retirement income funds (often called managed payout funds) are actively managed to ensure retirees don’t burn through their retirement savings too quickly. Additionally, such funds aren’t really akin to annuities, as they offer no income payment guarantees.
[See: The Best ETFs Retirees Can Buy.]
“Retirement income funds (RIFs) are generally defined as funds that make regular payouts over time and strive to keep pace with inflation,” says Matthew Eads, portfolio manager and securities analyst at Eads & Heald Investment Counsel in Atlanta. “They tend to not draw down one’s principal, and they’re attractive for people who want to balance income with preservation of their principal.”
“Basically, RIFs aim to be simple autopilot types of investment vehicles,” Eads says.
How do retirement income funds work?
“An investor chooses a time frame or end date of the fund, and the investment managers do the rest; over time, as the investor goes further down the glide path of the time frame, the fund shifts into less risky assets and out of riskier assets,” he says
One major downside is that the funds tend to be overly conservative even in early years when an investor can likely accept more risk, Eads adds. “Thus, investors may suffer opportunity losses,” he says. “Also, investors must also remain aware of what’s going on within the fund itself and be aware of expenses.”
Beyond that, the cornerstone of any retirement income fund is income — how to generate and manage it successfully.
“The 1990s have long passed, and the days of yanking 4 percent out of your retirement accounts to maintain your lifestyle while resting easy at night, confident you’ll never run out of money, are over,” says Chris Heerlein, an investment advisor and partner at REAP Financial LLC in Austin, Texas.
That’s where retirement income funds can help. “These funds seek to offer steady monthly income with an opportunity for conservative growth,” Heerlein says. “One of the greatest benefits of retirement income funds is that they can offer stable annuity-like payouts that keep up with inflation, without all of the expenses, gotchas and lack of liquidity found in the annuity minefield.”
While retirement income funds provide payout targets ranging from 2 to 6 percent, the big question is can the fund managers hit these benchmarks? Maybe not.
“With an interest rate environment not seen since the Great Depression, there have been many reductions across the industry due to lackluster performance,” Heerlein states. “Consequently, more conservative investors must be aware that these funds can lose money. They may also cut the payouts if necessary. This may mean your lifestyle trends with the market swings through your retirement years.”
Other investment experts warn retirement income fund investors not to don any rose-colored glasses, as there are myriad limits, and even some roadblocks, to such funds.
“People expect too much when mutual/index funds are bundled this way and retirement income is mentioned,” says Darryl Rosen, founder of Chicago-based Rose Advisory Group. “Overall, this does not change the fact that people must plan to reduce taxes and live within their means. That’s what matters in retirement.”
[See: 10 Long-Term Investing Strategies That Work.]
Don’t count Rosen in the company of money managers who love retirement income funds. “They’re not terrible, but they’re a fancy way to hold a diversified, predominately bond-based investment portfolio,” he says. “You can do the same thing without the fancy fund name.”
The downsides resemble what you would find in a target-date fund, Rosen says. Here are three key points in that regard:
— There are no guarantees. “My anecdotal experience with clients is that they think they are guaranteed something with retirement income funds,” Rosen says. “That’s not so. This is especially troubling because these products are geared toward individuals who have already retired.”
— All these funds are different. The big companies that provide these funds have different bond-to-stock ratios and different means of diversification within the individual stock and bond category, Rosen says. “Thus, caution is needed to make sure you’re getting a mix that fits your risk tolerance and needs,” he says.
— Returns are low because these funds are on the lower end of the risk spectrum. “While it’s wise to be more conservative in retirement, retirees typically are too risk-averse and their funds don’t keep pace with inflation,” he says. “That’s especially so with medical cost inflation, which is rising at a higher rate.”
As with any investment, read the fine print, get some help making the right decision and understand that these vehicles can lose value, Rosen says.
If you’re a retiree, or about to become one, Neil Angel, president of AngelRoyce Wealth Advisors LLC, in Greenville, South Carolina, offers some handy pointers on what you should know about retirement income withdrawals, with or without retirement income funds:
Account for any difference between essential income needs — like monthly utilities, car and grocery expenses — and nonsavings-based income from Social Security and a pension.
Be aware of the “sequence-of-returns” risk or the disproportionate impact that early portfolio losses in retirement can have on the longevity of your money.
Think about how your goals will shift over time, from the accumulation to income-withdrawal phases.
Consider the risk of inflation, specifically, how it might affect bond fund performance and future cost-of-living needs,
Categorize investments by short-term, intermediate and long-term inflation-adjusted income needs.
[Read: Is It Time to Invest in Inflation-Protected Annuities?]
Don’t forget about annuities, which are insurance products designed specifically to provide retirement income with lifetime guarantees, even if the principal is depleted.
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These Funds Could Force You to Manage Your Retirement Income Better originally appeared on usnews.com
