A retirement income fund (RIF) is a conservative investment that many people use to prepare for retirement. By investing in RIFs, retirees can earn regular income. However, that income isn’t always guaranteed. Here is how RIFs work and how their investments might look.
A financial advisor can help you create a financial plan for your retirement needs and goals.
How Do RIFs Work?
Retirement income funds (RIFs) are conservative investments that are actively managed. While they are not exclusively for retirees, they can work well for this group thanks to their combination of income and growth. Indeed, RIFs can provide returns through a combination of moderate growth and fixed income.
The consistent income you get with RIFs can help during market downturns, while their equity focus can also provide investment appreciation. There are many types of RIFs available. And you might see different terms attached to them like high-income, balanced fund and income-oriented. Hence, you might have to check the fund’s asset allocation to know whether it is a RIF.
Retirement Income Fund Allocation
Retirement income funds provide income to investors with fixed-income securities like high-yield debt, floating-rate debt, and U.S. government & investment-grade debt. They also invest in domestic and international stocks to provide portfolio growth. Lastly, they usually have a cash position as well to maintain a degree of liquidity.
For example, here is the December 2022 allocation for Vanguard Wellesley Income Fund Investor Shares (VWINX):
- Fixed income: 58.72%
- S. equity: 33.18%
- Non-U.S. equity: 4.71%
- Cash: 3.3%
- Other: 0.09%
While most of this fund invests in fixed-income securities, it also maintains a significant equity position plus a small cash allocation. As mentioned earlier, some RIFs invest more in stocks than they do in bonds. However, RIFs typically look to provide a stable source of income for retirees by investing in fixed-income securities.
Types of RIFs
A retirement income fund is a somewhat broad term that can include different types of funds. For instance, most RIFs are mutual funds, but they can come in other forms, like exchange-traded funds (ETFs). Some RIFs invest more in stocks, and some invest more in bonds. This is part of the reason some RIFs have terms like balanced in their name. Vanguard’s Wellington fund (VWENX) is one RIF that is heavily tilted toward stocks.
However, RIFs with a high stock allocation can provide income, too. VWENX has a two-thirds stock allocation but provides income in the form of dividends. Its most recently recorded yield is 2.6%, and it receives dividend distributions quarterly.
Advantages of RIFs
There are three common advantages of RIFs that make them worth considering:
- High yield: Although RIFs are typically on the conservative side, they can have higher yields than safe havens like savings accounts.
- Low risk: While retirement income funds are not without risk, they tend to be safer than pure equity funds.
- Simplicity: RIFs allow people to invest in a diverse set of asset classes without the need to manage their investments day-to-day.
Broadly speaking, retirement income funds are diversified funds in which people can invest and earn relatively high yields with minimal effort. This makes them ideal for retirees and those preparing for retirement.
Disadvantages of RIFs
Despite their advantages, those looking for investment income should also keep these three common disadvantages in mind:
- Fees can be high: Fees on RIFs can be upwards of 1% in some cases. There are many low-fee or even fee-free investments available today that might be a better alternative for some.
- Not risk-free: As mentioned, RIFs tend to be less risky than pure equity funds. However, they are not entirely without risk. Investors are not guaranteed to receive the same income every quarter if, for example, companies decide to cut dividends. Plus, their equity exposure means they are subject to price fluctuations.
- Longevity risk: Because RIFs are often heavy on bonds, there can be a risk that they don’t have enough price appreciation, which may lead to investors running out of money. This is known as longevity risk.
Bottom Line
Retirement income funds (RIFs) are actively managed investments that aim to provide a steady income stream for retirees. These funds invest in a diverse set of asset classes and are usually low-risk. However, some RIFs can be heavy on stocks. While RIFs are a simple, typically low-risk investment, they are not completely risk-free. Plus, some can have high fees, and there can be a risk of running out of money. These pros and cons should be considered before investing.
Tips for Investing in Retirement
- A financial advisor can guide you through major financial decisions, like determining your investing strategy. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Deciding how to invest can be a challenge, especially when you don’t know how much your money will grow over time. SmartAsset’s investment calculator can help you estimate how much your money will grow to help you decide which type of investment is right for you.
Photo credit: ©iStock/South_agency, ©iStock/damircudic, ©iStock/Moyo Studio