Eventually, we all want to stop working to enjoy the finer things in life — family, fishing … Friday-night blackjack in Vegas, if that’s your thing.
But how will you afford all that, let alone live, if you don’t work? How will you afford retirement?
According to management consultancy Gallup, most Americans will retire between the ages of 65 and 70. Assuming you’ve kept your health in tip-top shape, you might live well into your 80s or 90s.
You might have to plan for 30 years (or more) of passive income to get you through.
You need a long-term income plan in place for your retirement, and retirement income funds (RIFs) are a great place to start.
What are retirement income funds?
RIFs are well-diversified mutual funds designed to produce regular payouts on a monthly (or sometimes quarterly) basis.
RIF managers typically pool stocks, bonds, and cash equivalents to encourage moderate gains while keeping fund values in check.
RIFs can’t offer guaranteed income, as annuities do. They’re exposed to risk, which means you may lose some of your investment.
But they also have the potential to increase in value.
How do retirement income funds work?
Let’s create a hypothetical fund-to-fund managed payout fund with an annual distribution rate of 4 percent.
Why 4 percent? Financial advisors recommend a 4 percent withdrawal rate to prevent you from outliving your assets.
Let’s say our fund is worth $65,000.
You would have access to $2,600 (4 percent) broken up into twelve monthly payments of $216.67 each — not enough to live on, clearly, but a nice addition to your other income streams.
Keep in mind these numbers would fluctuate with fund performance.
Our hypothetical RIF employs a fund-to-fund strategy, which means it invests in other funds rather than directly in market securities. This automatically diversifies your investment portfolio, which lowers your risk.
In addition, you won’t surrender your assets if you pass away — you can include them in your will.
Why invest in retirement income funds?
Each retiree has his or her own reasons for investing in a RIF. But every retiree does so for the same primary reason — to supplement retirement income with regular payouts. Here are four other reasons you might want to support your retirement with a RIF:
- They’re a type of mutual fund.
If you’re familiar with mutual funds and how they work, you should already know how RIFs work. For those of you who aren’t, mutual funds are professionally managed investment pools that shareholders collectively fund to trade in securities. - Managers look after your money for you.
You’re meant to enjoy your retirement, not worry about your portfolio. Fund managers are there to do the worrying for you. - You can access your money at any time.
Need extra cash? No problem. RIFs give you easy access to your money, just as regular mutual funds do. Just be aware that the money you withdraw would come from your principal, so you might end up with less money paid out to you down the road. - Some diversify your investment portfolio.
Some RIFs use fund-to-fund strategies in a bid to grow your investment while diversifying your portfolio, reducing risk.
The bottom line
Overall, we think investing in a retirement income fund is a smart choice. RIFs offer a flexible, easy way to generate income in retirement, and they work like mutual funds, with many of the same benefits – professional money managers, easy access to your money, and diversification of your portfolio.
