Retirement Income Funds: Generate Steady Income in Retirement

Retirement income fund is a relatively new product the mutual fund industry offers investors who want to maintain a steady stream of income when in retirement. Generally, retirement income funds, sometime also call managed payout funds, are actively managed mutual fund portfolios that consists of many individual mutual funds that can be either passive/index funds or actively managed funds. The goal of these investments is, by carefully selecting the portfolio’s components, to provide investors with a stream of income that could be equivalent to anywhere between 3% to 12%. On one hand, retirement income funds are similar to annuities because the way they generate incomes, though the amount of income is neither fixed nor guaranteed, which is different from annuities. For retirement income funds, the payment an investor receive depends on how much he or she put into the fund. On the other hand, they also work like lifecycle funds in terms of asset allocations because both lifecycle funds and retirement income funds are made of individual mutual funds that cover many asset classes to provide diversification and allocations to asset classes are adjusted by the fund manager based on the fund’s investment objective (for retirement income funds, it is to generate the desired target income for investors) which could change over time.

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There are many retirement income fund offerings from mutual fund companies, with big names such as Vanguard, Fidelity, T. Rowe Price and PIMCO all having their own products. Though all these funds aim to generate retirement income for investors, the ways they are constructed differ, in some cases a lot. For example, Fidelity offers a total of 14 target income replacement funds, which target date from 2016 to 2042. The main feature of these funds is that they all have a target date, at which time the fund will be liquidated. Vanguard, on the other hand, has one retirement income fund and three payout funds, and all of them apparently will run forever because, unlike those Fidelity funds, they don’t have liquidation dates. Also, just like other Vanguard mutual funds, investors can buy and sell those funds at any time. One thing in common between Fidelity funds and Vanguard funds is that they all distribute monthly payments to investors.

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Following is a list of retirement income funds currently offered by the four mutual fund companies mentioned above, with basic fund information and asset allocation.

Retirement Income Funds: Basics and Asset Allocation

Fund NameExpense (%)Min. Inv.Yield (%)Turnover (%)Stocks (%)Bonds (%)Cash (%)
Fidelity Income Replacement 2016 Fund (FIRJX)0.51$25,0001.8440.026.047.525.4
Fidelity Income Replacement 2018 Fund (FIRKX)0.54$25,0001.8624.033.643.521.8
Fidelity Income Replacement 2020 Fund (FIRLX)0.56$25,0001.8438.039.640.319.1
Fidelity Income Replacement 2022 Fund (FIRMX)0.58$25,0001.8524.044.237.717.1
Fidelity Income Replacement 2024 Fund (FIRNX)0.59$25,0001.8634.047.336.015.8
Fidelity Income Replacement 2026 Fund (FIROX)0.60$25,0001.8061.049.734.514.8
Fidelity Income Replacement 2028 Fund (FIRPX)0.61$25,0001.8516.051.733.413.9
Fidelity Income Replacement 2030 Fund (FIRQX)0.62$25,0001.7631.053.232.513.4
Fidelity Income Replacement 2032 Fund (FIRRX)0.63$25,0001.7995.054.931.612.6
Fidelity Income Replacement 2034 Fund (FIRSX)0.64$25,0001.7722.056.530.811.7
Fidelity Income Replacement 2036 Fund (FIRUX)0.65$25,0001.8126.
Fidelity Income Replacement 2038 Fund (FIRVX)0.66$25,0001.8523.060.529.09.6
Fidelity Income Replacement 2040 Fund (FIRWX)0.67$25,0001.86129.062.928.08.2
Fidelity Income Replacement 2042 Fund (FIXRX)0.68$25,0001.8720.063.927.67.5
Vanguard Managed Payout Distribution Focus Fund (VPDFX)0.38$25,0006.4548.
Vanguard Managed Payout Growth and Distribution Fund (VPGDX)0.36$25,0004.4150.075.314.99.5
Vanguard Managed Payout Growth Focus Fund (VPGFX)0.41$25,0003.8960.
Vanguard Target Retirement Income Fund (VTINX)0.17$3,0002.4012.062.729.97.1
PIMCO Real Income 2019 Fund A (PCIAX)0.79$1,00010.9445.
PIMCO Real Income 2029 Fund (POIAX)0.79$1,0005.41445.00.0100.00.0
T. Rowe Price Retirement Income Fund (TRRIX) 0.59$2,5002.401.3741.848.69.3

It’s quite clear from the table that most of the ¬†funds have very high turnover ratio as compared to funds in other categories. This is because that all retirement income funds are actively managed funds and in order to meet the income target, fund manager may need to twist the fund’s asset allocation very often, which will result in capital gain distributions. This may not be desirable if the fund is held in a taxable account.

As mentioned earlier, the main goal of retirement income funds is to generate targeted income for investors, even though that target is not guaranteed. However, there may be times when dividends from underlying stocks are not enough to make targeted monthly or annual payments (one such example is 2008 when many companies hit hard by the financial crisis reduced their stock dividends). If that happens, the fund may need to return some principal back to investors to make up the shortfall. When the principal is reduced and no additional investment is made, the payout in the following year could also be reduced. This is something to keep in mind when considering retirement income funds.

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One Response to “Retirement Income Funds: Generate Steady Income in Retirement”

  1. Ron |  Nov 02, 2011 at 9:31 pm

    The way things are currently going it is hard to entrust your retirement and future income in the hands of investors, especially when offered no certainties.