If you are a typical American approaching your sixties, you likely look forward to retiring and slowing down to enjoy the fruits of years of saving. You might hope that your nest egg will support you for the rest of your days. The best retirement funds can help retirees to get regular income to take care of their necessities without needing to enter the workforce again.
The right retirement fund varies depending on the financial situation and the financial goals of the retiree. Most people’s investment objectives for retirement have elements of cash preservation, income generation, and asset growth. In this article, we help you to compare the best retirement funds in the U.S.
FAQ on the Best Retirement Funds
1. What Is a Retirement Fund?
A retirement fund is one whose objective is to help people save for when they retire. The fund will then supply the retiree with funds as a pension. The best retirement funds treat their investors as short-term and intermediate-term investors.
2. What Factors Should I Consider When Choosing a Retirement Mutual Fund?
Your income is a big part. You also need to factor in if you have alternative incomes sources like social security, pension, or if you’ll continue doing some gigs after retirement. Life expectancy and how much risk you can tolerate also determine the type of fund you’ll invest in.
3. How Can I Minimize Taxes on My Retirement Income?
For most retirees, the investment in a fund can get tax-deferred status if you invest through your 401k (k) or traditional IRA. This means that your income won’t be taxed until you withdraw it.
4. What Is the 4 Percent Rule for Retirement Income?
Before retiring, it is good to set up a plan for how much of your money you will withdraw every year (the withdrawal rate). A food rule of thumb is to draw at a 4 percent rate. This means that if you need to withdraw $20,000 per year from your account, you need to stash away at least $500,000. Of course, each person’s situation varies, but the 4 percent rule assumes that at the highest inflation rates, you will not run out of income some 30 years after retiring.
5. How Do I Determine if a Certain Retirement Fund Fits My Investment Objectives?
Certain funds are dubbed “income replacement funds” or “retirement income funds” and their strategies are made with retirees in mind. As opposed to regular mutual funds that may prioritize growth, such funds focus on preserve assets, generating income, and growth–in that order. Growth is not prioritized for must retirement funds because it would involve significant exposure to risk. If the fund does not make enough efforts to preserve your capital, it is probably not a good retirement fund.
How We Reviewed
We paid attention to the performance of the funds in terms of annual returns. Because short-term returns may vary dramatically over the years, we judged a fund’s yields using data from 5-year or ten-year periods, if available. We also considered the potential risk of the fund’s investment strategies. This, we judged depending on the type of assets the fund invests in. We also endeavored to find out the fund managers of the funds and what reputation they have.
Finally, we considered the expenses retirees would incur if they invested in the funds. This we have expressed as the expense ratio in percentage. We have also considered the minimum investment amount for each fund.
Overall Expense Ratios for the Best Retirement Funds
The expense ratio for the best retirement funds ranges from 0.04 percent to about 0.97 percent. This means that the investor pays between $4 and $97 for every $10,000 they have in the fund per year.
What We Reviewed
- Vanguard Wellesley Income
- State Farm Lifepath Retirement Fund
- Fidelity Capital & Income (FAGIX)
- Schwab U.S. Large-Cap Value ETF (SCHV)
- Vanguard Tax-Managed Balanced Fund (VTMFX)
- Dodge & Cox Stock (DODGX)
- Loomis Sayles Bond Retail (LSBRX)
- PIMCO RealPath Income Fund
- USAA Target Retirement Income Fund
- JPMorgan SmartRetirement Income Fund
Vanguard Wellesley Income
The Vanguard Wellesley Income (VWINX) fund is a good choice for investors who need a conservative and low-cost mutual fund. The fund is composed of roughly 66 percent bonds and 33 percent stocks. The fund is more biased towards income compared to growth, and it has good long-term returns.
Its fixed-income side has almost 1,000 bonds that vary greatly in terms of credit quality and duration. Stocks in this fund include Microsoft Corporation, Wells Fargo, JPMorgan Chase, and other major companies. Expect to spend about 0.22 percent of your money in expenses. The fund allows a minimum initial investment of $3,000 and is ideal for people who prefer a conservative approach to investing.
State Farm Lifepath Retirement Fund
The State Farm Lifepath Retirement Fund (SLRA) invests in equity, like real estate investment trusts and bond exchange-traded funds. This fund, which has assets worth $1.1 billion, focuses on long-term investments so it is best for young people whose expected retirement date is still years away. This fund yielded returns of 3.62 last year and about 5.36 percent over the last ten years. Fees for this fund average 0.50 percent. The fund has a rather high 5 percent front-load (sales) fee. This fund risk potential is average compared to other funds.
Fidelity Capital & Income (FAGIX)
Fidelity Capital & Income ranks highly amongst the best retirement funds in terms of high yields. At an expense rate of 0.67 percent, this fund is a bit extensive. The fund has a yield of 3.9 and a 9.9 percent lifetime average annual return. But these returns come with significant risks. The bond portfolio of this fund is mainly made up of below-investment-grade issues. The fund dedicates nearly 20 percent of its portfolio to growth stocks like Skyworks Solutions, Alphabet Inc, and Qorvo. This fund has a minimum initial investment requirement of $2,500.
Schwab U.S. Large-Cap Value ETF (SCHV)
The Schwab U.S. Large-Cap Value ETF has a very small annual fee (0.04 percent). This fund is one of the least expensive funds around. Clients of this fund can also trade without paying commissions. The fund focuses on value stocks which tend to be less volatile compared to growth stocks. This fund holds 360 stocks and tracks the Dow Jones Large-Cap Value Total Stock Market Index. The SCHV dedicates 20 percent of the investors’ funds to financial services stocks, and 29 percent goes into technology and consumer staple stocks.
Vanguard Tax-Managed Balanced Fund (VTMFX)
The VTMFX is one of the best retirement funds for retirees who have taxable accounts. VTMFX targets countering taxes and inflation by investing 50 percent of its clients’ money in stocks like Apple, Alphabet, and Microsoft. The other 50 percent is dedicated to tax-exempt municipal boards (at the federal income level). Low-income earners may struggle to invest in this fund since its minimum initial investment amount is $10,000 but most retirees should be able to raise this much. This fund works well either as the core holding or as a means of diversification. The expenses for this fund are quite low at just 0.09 percent.
Dodge & Cox Stock (DODGX)
DODGX is one of the best retirement funds for investors wanting a low-cost solution that is actively managed. This fund started way back in 1931 and is one of the nation’s oldest funds. The fund also sets itself apart when it comes to performance and cost. Its 20-year annualized return is about 9 percent and is one of the best returns of any fund.
This fund invests most of the funds in common stocks of big companies like Bank of America while the remaining funds are invested in bonds and select preferred stocks. This fund has a minimum initial investment requirement of $2,500 and expenses will take up 0.53 percent of your cash.
Loomis Sayles Bond Retail (LSBRX)
Loomis Sayles Bond Retail is a bond fund that invests in bonds from a number of sectors. The fund works well if you invest in it as a compliment to your core holding. This fund is managed by Dan Fuss, whose experience in managing such assets spans back for almost half a century. In addition to U.S, bonds, the fund has some foreign bonds. Yields from this fund are about 3.2 percent. However, the fact that the fund has some international bonds creates added risks to investors. Expenses for this fund are rather high at about 0.91 percent, and you need to invest at least $2,500 to open an account with this fund.
PIMCO RealPath Income Fund
This fund is an open-end type and its objective is to maximize real return and preserve capital. This fund invests mostly in underlying funds but also invests in other securities. The fund returned 3.02 percent last year and 5.19 percent over the past decade. Fees for this fund are average, and its expense ratio is 0.38 percent.
USAA Target Retirement Fund
The United Services Automobile Association (USAA) was launched in the 1920s. The association started by setting up a mutual insurance company for people other companies deemed too risky to insure. Currently, the USAA Target Retirement Income Fund requires investors to inject a minimum of $500 as the initial investment. This fund’s main objective is capital appreciation. The fund’s asset portfolio is composed of about 35 percent underlying USAA funds that invest in securities and alternative assets. The other 65 percent is allocated to underlying USAA funds that invest in fixed-income securities.
The fund has yielded about 2.99 percent in past five years. The USAA Target Retirement Fund has a high net expense ratio which can be as high as 0.97 percent for some people.
JPMorgan SmartRetirement Income Fund
The JPMorgan SmartRetirement Income fund is a target-date fund that uses insights from J.P. Morgan’s specialists to invest. The fund follows a passive-active strategy to allocate assets. Portfolio managers for this fund include Jeffrey Geller and Anne Lester, and the fund has assets worth about $3.65 billion. This fund, however, does not entertain applications from low-income people as its minimum initial investment is set at $1 million. There is no minimum for subsequent investments, however.
This fund’s 10-year yields is 6.78 percent. The cost of this fund is on the high side, and gross expenses total about 0.70 percent with net expenses at 0.61 percent. The fund has a diversified portfolio that allocates about 60 percent to both domestic and international fixed-income bonds and 34 percent to equity.
The Vanguard Wellesley Income is one of the best retirement funds you can invest in. At a cost of 0.22 and a minimum initial investment of $3,000, the fund is affordable for most people thinking about retirement. Unlike some funds which pursue very aggressive and risky investment strategies, the VWINX normally plays it safe and invests mostly in reputable bonds and stocks, so it is very unlikely that you will lose your hard earned money when you retire.
If you are more focused on growth and don’t mind the risk, then Fidelity Capital & Income (FAGIX) is one of the best retirement funds in terms of pursuing an aggressive growth strategy. But investors are exposed to an above average risk of losing their investment with this fund.