Ah, retirement. No more snarled commutes, demanding bosses or tight deadlines. But after saving for decades, you now have to figure out how to turn your nest egg into a cash spigot. “It’s a big moment going from earning an income to not earning an income. There’s a lot of emotion and change,” says Jeffrey DeMaso, editor of The Independent Vanguard Adviser, a newsletter for Vanguard fund investors.
Re-engineering your portfolio from accumulation mode to decumulation mode can be daunting. You’ll have to get a handle on how much you need for essential expenses, and you’ll need a strategy to cover them for the rest of your life. “The biggest fear people have about retirement is running out of money,” says Anne Ackerley, head of retirement business at BlackRock.
Fortunately, a variety of products and services – some new, others new-ish – are designed to help people spend and invest their savings wisely in retirement. Some are available only in certain workplace retirement savings plans, so access depends on whether it’s offered in your plan. Other funds or services are available to all individual investors. We’ll walk you through some of the options. All data and returns are through November 30, unless otherwise noted.
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Look for retirement income strategies in your 401(k)
The first place to look for help is your workplace retirement plan. The SECURE Act, a broad package of changes to rules governing retirement and retirement savings plans, eased the way for corporate retirement plans to include annuities, which are insurance products that pay fixed annual sums, typically for life. In response, some 401(k) plans are beginning to offer target-date strategies with an annuity component that offers a paycheck-like experience in retirement.
Like their conventional target-date-fund predecessors, target-date-plus-annuity strategies invest in multiple asset classes that shift over time to a more conservative mix as you age. The twist is, at a certain point along that glidepath some of your contributions are directed to an annuity. BlackRock’s LifePath Paycheck and Nuveen’s Lifecycle Income series are two examples. Both will be available in some retirement plans this year.
The way the annuity portion works varies. Nuveen’s funds invest a portion of the bond portfolio in an annuity at the start of the series’ glidepath, 45 years before retirement. The annuity allocation starts at 2.5% of the portfolio and increases to 40% at the end of the glidepath. Allocations to the annuity contract included in BlackRock’s LifePath Paycheck series, by contrast, start when investors hit age 55. The annuity makes up 8% of the overall portfolio to start and climbs to 30% over the next 10 years. In both series, the annuities have the risk-and-return profile of a broad-market bond fund.
Both the BlackRock LifePath Paycheck and the Nuveen Lifecycle Income series allow investors to choose when to turn on the income. At what age those payments can begin, however, depends on the strategy. Investors can also choose never to turn on the income feature if they don’t want or need it. Plus, the annuities are institutionally priced (read: less expensive). There’s no transaction fee or sales charge related to the annuity part of the target-date strategies, though there is a fee that the insurance company pockets. According to Nuveen, it is reflected in the annuity payout.
Expect more retirement funds with annuities to appear in workplace retirement plans. “Within 10 years, target-date funds with income are going to be the main thing in retirement plans,” says BlackRock’s Ackerley.
Not all retirement income strategies in 401(k) plans are tied to annuities. The Fidelity Managed Retirement target-date funds employ a cash-withdrawal strategy that starts at 4% of assets and gradually increases over time as you age. Choose the fund that aligns closest to the year you turn 70. Experts set the glidepath and do the ongoing asset allocation for these 401(k) offerings, as well as create a payout schedule for you. “The idea is to provide stable payments and still have a remaining balance,” says Sarah O’Toole, a Fidelity institutional portfolio manager.
T. Rowe Price has a 401(k) plan offering called Retirement Income 2020 that aims to deliver a 4%-to-5% payout a year in monthly distributions, but it depends on the fund’s return. There are only two vintages so far: 2020 and the soon-to-launch 2025. “When the portfolio does well, the payout goes up. When it doesn’t, the payout goes down a bit,” says fund comanager Andrew Jacobs van Merlen. These strategies are also available to retail investors as mutual funds (more on them later).
Retirement income funds for everyone
If your 401(k) plan doesn’t offer retirement income funds like the ones we just mentioned, or a defined-contribution plan isn’t available to you, you have a handful of mutual funds and financial services to consider. Unfortunately, none feature the guaranteed income of an annuity.
We should note that retirement income funds aren’t a new idea. Several firms, including Fidelity and Vanguard, launched managed-payout funds in 2007 and 2008 that promised to provide a steady income stream. The timing was terrible (around the arrival of the Global Financial Crisis). The funds didn’t catch on.
That said, the stars are aligning for retirement income funds today: More retirees are looking for help managing income, interest rates are higher, and the stock market is recovering.
We don’t expect you to put all your eggs in one basket – or one fund – to create a workable retirement income strategy. In most cases, retirees should consider generating cash flow from multiple strategies and sources. “You’ll need an array of tools and products,” says T. Rowe Price’s Jacobs van Merlen, taking into consideration the risks you’re willing to take, how long you’ll live, and how much you’ve already saved, among other things. Bear that in mind as you peruse the following options.
The aforementioned T. Rowe Price Retirement Income 2020 (symbol TRLAX, expense ratio 0.53%) is available as a mutual fund to individual investors. A 2025 version will launch this year. The minimum investment for either fund is $25,000.
The managers aim to generate a 4%-to-5% payout of the fund’s average net asset value over the past five years, but the monthly distribution will vary from year to year depending on the fund’s performance. (For its first five years, the Income 2025 fund will use the average net asset value of T. Rowe Price’s standard Retirement 2025 target-date fund to calculate the payout rate.) The goal is to “live off the income of the portfolio without dipping into the principal,” says Jacobs van Merlen, though there’s no guarantee on that front. So far, the 2020 fund’s annualized return since inception in mid 2017 is 5.9%, which falls in line with the fund’s annual target payout.
At last report, Retirement Income 2020 held roughly 50% in stocks and 50% in bonds, cash and other assets. The underlying funds include some of the firm’s longtime winners, such as T. Rowe Price Growth Stock, Value and Mid-Cap Growth.
Schwab Monthly Income funds – there are three – launched in March 2008 and have been tweaked over time. Their main objective is to provide a monthly income stream, although payouts can vary from year to year, and even from month to month.
Conservative investors who want to preserve principal should opt for the repetitively named Schwab Monthly Income Income Payout (SWLRX, 0.21%), which holds 30% in stocks and 70% in bonds. Monthly payouts are limited to interest and dividend payments from the portfolio’s underlying funds. In a normal interest rate environment, investors might get an annual payout rate of 3% to 5%; they’d get less in low-rate environments. Over the 12-month period ending in October, the fund’s payout rate was 4.15%. But in low-rate environments, the payout rate was lower (for the calendar year 2022, it was 2.42%).
Moderate-risk investors can choose between the Schwab Monthly Income Target Payout (SWJRX, 0.25%) and the Schwab Monthly Income Flexible Payout (SWKRX, 0.25%). Both hold exchange-traded funds, with 50% of assets in stock funds and 50% in bond funds.
Target Payout aims for a steady annual payout of roughly 5%, though it could be higher or lower. The fund’s payout rate was 3.08% in 2022, and for the 12-month period through October it was 5.39%.
Flexible Payout is designed for investors who can deal with more flexibility in their income stream. The fund aims for an annual payout between 4% and 6%, depending on fund performance and the market environment. In the tough stock and bond market of 2022, the fund paid out 2.96%. But for the year ending in October, the fund’s payout rate was 5.19%. Payments from both funds may include some return of capital.
The catch with these funds is that overall returns have been ho-hum. That may be an acceptable trade-off for investors who want a monthly income stream, but in lean years, you will probably get more capital returned to make that happen. Over the past five years, Flexible Payout’s annualized 2.6% return lags 91% of its peers (moderately conservative allocation funds). Income Payout’s five-year return, 1.9%, lags 78% of its peers (conservative allocation funds).
A trio of American Funds Retirement Income Portfolios are worth a look for investors who are less dependent on a regular check and seek a little more capital appreciation. These funds make quarterly distributions and have no payout target because they’re designed to be a resource for discretionary spending, not necessary expenses. But the experts behind the funds suggest ranges for annual withdrawal rates for each portfolio. In rough markets, for instance, investors should consider lowering their withdrawal rates.
Investors in the series’ most conservative portfolio, American Funds Retirement Income Portfolio – Conservative (FAFWX, 0.64%, yield 3.28%), might consider a suggested annual withdrawal rate of 2.75% to 3.50% of their assets in the fund. The portfolio holds almost 40% in stocks and 60% in bonds and cash. The ideal withdrawal rate for the moderate fund, American Funds Retirement Income Portfolio – Moderate (FBFWX, 0.68%, 3.02%), which holds roughly 50% in stocks and 50% in bonds, ranges between 3.00% and 3.75%. And the most aggressive strategy, the American Funds Retirement Income Portfolio – Enhanced (FCFWX, 0.69%, 2.79%), which holds 60% in stocks, has a suggested withdrawal range of 3.25% to 4.00%.
These portfolios, which hold some of American’s best mutual funds, including American Balanced, have annualized returns over the past five years that are middling at best. But they have experienced below-average risk relative to peer funds. In 2022, when stocks fell 18% and bonds declined 13%, the Conservative and Moderate funds both lost 10.1%; Enhanced lost 11.1%. Those returns ranked among the top 20% of their peers or better.
Finally, investors interested in a digital advisory service might consider Schwab Intelligent Portfolios. The service helps retirees generate a check from their investment portfolio through a feature called Intelligent Income. Based on the sum of money you invest with the robo service, Intelligent Income helps you figure out how much you need to withdraw and how to invest to stay on track, and it lets you set up automatic checks from your account, paid monthly, quarterly or once a year.
You can stop, start or adjust the payout at any time, says Kristina Turczyn, head of digital advice and wealth solutions at Charles Schwab. “We wanted to offer an easy way to automate the process and generate a paycheck from your own investment portfolio.” There’s no advisory fee for Intelligent Portfolios and no additional fee for Intelligent Income.
Note: This item first appeared in Kiplinger’s Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
