best mutual fund for retirement income

Retirement Income

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Steady flow of income is expected post retirement.  While at the same time, the rate of return on investment should be able to beat inflation.  It is essential to plan ahead for a steady flow of Income post retirement.

Best mutual fund for retirement is a fund where you start off in a low cost stock funds, then as you near retirement, migrate towards balanced funds.  And Emergency needs are safely parked in a Money market fund.

Before we dive into retirement income options, it is important to understand that mutual funds come in a variety of flavors and objective.  Some are designed to grow your wealth, a few others prioritize capital protection over returns, and a few others are designed to offer steady source of income.

If you want to start with the very basics of mutual funds, the first few paragraphs of the article written here should help.

what financial life stage are you at right now?

To be able to make best use of this article, it’s important to understand your life stage.  Are you earning steadily and worried about retirement, are you already retired and want to check out a few options, OR are you an early bird planning well ahead of time?

Already retired: if you are already retired and have a good nest egg saved, the priority would be to protect your capital and then aim for steady income.  It would not be suitable for you to go for an all stock funds as the fund’s inherent volatility can harm your portfolio and income may not be steady.

Nearing retirement: for someone nearing retirement in the next few years, it would be wise to start making portfolio changes so that as you retire, your investments stay protected from volatility and start generating income.

Young investors planning for retirement: If retirement is a long way away for you and you are planning on savings for the same, good job !  Since you have time in your hand, you should prepare a strategic plan where you will begin with an all stock fund or an Index ETF and then migrate towards a more balanced fund as you approach retirement.  This way, you would have given your savings an opportunity to grow with the market returns. 

I’ve a detailed article for young investors here. 

What factors to consider while selecting mutual fund for retirement income?

Cost/fees:  I consider mutual fund fees a deal breaker when it comes to deciding on which one to select.  Even a 1 % difference in fees has a significant impact on long term returns of a portfolio.  The lower the cost, the better.  

Asset Allocation: mutual funds are broadly classified as Equity funds, Bond/fixed income funds and Balanced funds.  Equity funds invest mostly in stocks and are subject to fluctuations.  Pure Bond and fixed income invest in debt and treasuries but these investments alone may not fetch you enough returns.  And then there are balanced funds, which have equity and debt component to them. Best of both worlds.  

So, depending on the time you have to retirement, you need to plan an asset allocation strategy.  More time you have, start off with Equity funds, as you are nearing retirment, gradually switch to Balanced funds.  

Set aside some money for an emergency.  This can be invested in pure Bond or money market fund.  This way, you will not be touching your retirement savings when you need cash urgently. 

Time to retirement: time to retirement is an important factor.  If you are a young investor and have a lot of time – things are easier.  But, if you could not save much and retirement is near – it becomes complicated. 

The early everyone starts the better.  But, not everybody’s life is the same. Not everyone is money smart.  We all have made mistakes and lost money in the process.   

Amount required post retirement: At this point, it is important to arrive at what is a good amount that you need after retirement and plan on how you can achieve that goal.  

If your current job does not pay you enough to achieve your financial goal, than maybe think of some side hustles, passive income or another part time job. 

Emergency stash amount: this step is an absolute must.  Arrive at an emergency fund amount and save it in a money market fund.  Money market funds are low risk investments that offer high yield and easy of access.

What types of mutual funds are best for retirement income?

Balanced funds.

Having said that, the ideal scenario would be to have started early with stock funds or ETFs, and then slowly migrated to balanced fund.  

Balanced fund offers mix of income and growth potential.  Investing only in pure equity is not advised as these funds are subject to market risks.   And also, investing in pure Bond fund is not advised as they may not bring in decent post inflation returns. 

Balanced fund offers middle path with exposure to both Equity and Bond.

What are other options for retirement income?

Apart from the balanced fund approach, there are a few other ideas that you can consider when deciding on retirement income.  

Index ETFs : Combination of Broad based index etf and Bond etf is my personal choice.  I’m a DIY investor and i like to keep costs to a minimum. Broad based index etfs are the best choice as they have beaten most active fund managers in returns and have been the lowest cost instruments.  

I’d use the rule of 110 to divide my savings between Index etf and Bond etf.  And keep reallocating my assets each year on my birthday or anniversary or any date of my choice.

Once retired, you can use the 4% rule to have a steady income.

Index portfolio and Covered call : this strategy may not be suitable for all.  If you are ready to spend time learning more about the markets, then this might be an option for you.  Covered call is a derivatives strategy where you can get a steady income from your saved portfolio.  This strategy also offers downside protection to a small extent.  

If i decide on writing covered call, I’d use the portfolio created using Index ETFs and write calls on the same index for monthly income. 

In conclusion

Planning early is the key.  Even if you have not started savings early, there is hope.  As long as you keep the above factors in mind, you should be ok.  

Arrive at your retirement amount, strive to earn more and retire early. 

for more information check out the Tool kit section of this website here

Below are some of the resources from amazon to help you for your retirement planning:

Index Investing

Mutual funds

Covered Call

Side hustle ideas

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I wish you well.

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