Farran Powell
Farran Powell
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BLUEPRINT
Updated 6:36 a.m. UTC June 3, 2024
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Retirement income funds are designed to provide a steady income stream post-retirement and ensure better capital preservation, reducing the burden of individual portfolio management while offering diversification.
“Think of retirement income funds as the Swiss Army knife of the financial world,” said Taylor Kovar, CEO at Kovar Wealth Management. “They’ve got a tool for every occasion —stocks, bonds, you name it — all aimed at generating a steady paycheck for your golden years.”
To find the best retirement income funds of 2024, we screened the available universe based on fees, total assets, track record, historical returns, minimum required investment and more.
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Best retirement income funds
- Vanguard LifeStrategy Income Fund (VASIX).
- Vanguard Target Retirement Income Fund (VTINX).
- Fidelity Freedom Index Income Fund Investor Class (FIKFX).
- Schwab Monthly Income Fund Income Payout (SWLRX).
- Schwab Monthly Income Fund Flexible Payout (SWKRX).
- Schwab Monthly Income Fund Target Payout (SWJRX).
Vanguard LifeStrategy Income Fund (VASIX)
Expense ratio
0.11%
Total assets
$4.0 billion
What you should know
Vanguard LifeStrategy Income Fund (VASIX) is the most conservative and income-focused fund in Vanguard’s “LifeStrategy” lineup. The LifeStrategy funds feature predetermined allocations of stocks and bonds based on different goals, such as growth, income, or a balance of both. VASIX targets the latter with an allocation to U.S. and international stocks against a much higher allocation to U.S. and international bonds. According to Vanguard, this fund is best suited for investors looking for short- to medium-term investment, with a focus on income and modest share price movement.
Pros and cons
Pros
- Low expense ratio.
- Globally diversified in bonds and stocks.
- Long track record dating back to September 1994.
Cons
- It only pays quarterly dividends.
- The allocation may be too conservative for some investors.
- Requires a $3,000 minimum investment.
More details
- 10-year annualized total return as of September 30: 2.76%.
- Minimum investment: $3,000.
Vanguard Target Retirement Income Fund (VTINX)
Expense ratio
0.08%
Total assets
$34.4 billion
What you should know
Vanguard’s target-date fund for those already retired is the Vanguard Target Retirement Income Fund (VTINX), which features a bond-heavy strategy designed to prioritize income and capital preservation. The fund is split approximately 30% in stocks and 70% in bonds, both of which are diversified globally. Within the bond allocation, VTINX also features around a 17% allocation to short-term Treasury Inflation-Protected Securities (TIPS), which are less sensitive to inflation and interest rate shifts.
Pros and cons
Pros
- Lower expense ratio.
- Globally diversified in stocks and bonds, including TIPS.
- High in total assets and a decent track record dating back to October 2003.
Cons
- It only pays quarterly dividends.
- Requires a $1,000 minimum investment.
- Conservative stock allocation.
More details
- 10-year annualized total return as of September 30: 3.60%.
- Minimum investment: $1,000.
Fidelity Freedom Index Income Fund Investor Class (FIKFX)
Expense ratio
0.12%
Total assets
$1.3 billion
What you should know
Fidelity Freedom Index Income Fund Investor Class (FIKFX) is one of Fidelity’s more conservative, income-oriented options in its passive index-based target-date funds lineup. This fund targets an asset allocation of around 11% in U.S. equity funds, 8% in international equity funds and the rest in U.S. bond funds, international bond funds, long-term Treasury bond funds, inflation-protected bond funds and short-term debt funds. Overall, FIKFX’s profile can be described as very conservative.
Pros and cons
Pros
- Low expense ratio.
- No transaction fees on Fidelity’s platform or 12b-1 fees.
- No minimum investment requirements.
Cons
- Smaller in total assets.
- Conservative stock allocation.
- A higher portfolio turnover rate of 22%.
More details
- 10-year annualized total return as of September 30: 2.56%.
- Minimum investment: $0.
Schwab Monthly Income Fund Income Payout (SWLRX)
Expense ratio
0.21%
Total assets
$61.7 million
What you should know
For retirement income, Charles Schwab offers three fund options. Schwab Monthly Income Fund Income Payout (SWLRX) is the “Income Payout” variant, which pays a variable annual yield based on the market environment. According to Schwab, this can range from near zero to 3% for a low-rate environment, 3% to 5% for a normal-rate environment and over 5% for a high-rate environment. The source of the income will be interest and dividends accrued by the underlying funds. Most of the underlying assets are in bond funds.
Pros and cons
Pros
- No minimum investment requirements.
- No 12b-1 fees are charged.
- Pays monthly dividends.
Cons
- The target yield can fluctuate based on market conditions.
- Higher expense ratio.
- Smaller in total assets.
More details
- 10-year annualized total return as of September 30: 1.90%.
- Minimum investment: $0.
Schwab Monthly Income Fund Flexible Payout (SWKRX)
Expense ratio
0.25%
Total assets
$63.2 million
What you should know
Retirees looking for more consistency in their annual income but still desiring some capital appreciation may prefer Schwab Monthly Income Fund Flexible Payout (SWKRX) instead. This fund targets a 4% to 6% annual yield and tries to provide some growth as well. Accordingly, it is allocated more aggressively, with roughly an even split between stocks and bonds. To meet the target annual yield, the fund may pay a return on capital and capital gains along with the usual interest and dividends. Return of capital is a distribution from the amount invested and is not a true profit.
Pros and cons
Pros
- No minimum investment requirements.
- No 12b-1 fees are charged.
- Pays monthly dividends.
Cons
- The concentration in stocks may be too aggressive for some retirees.
- Higher expense ratio than the other funds on this list.
- Smaller in total assets.
More details
- 10-year annualized total return as of September 30: 2.62%.
- Minimum investment: $0.
Schwab Monthly Income Fund Target Payout (SWJRX)
Expense ratio
0.25%
Total assets
$34.4 million
What you should know
Finally, Schwab offers the Schwab Monthly Income Fund Target Payout (SWJRX), designed to target an annual fixed 5% yield during most market environments. To achieve this constant yield, SWJRX is expected to make greater capital gains and return of capital distributions to augment its dividend and interest income. Like SWKRX, SWJRX features a more aggressive 50% stock and 50% bond allocation.
Pros and cons
Pros
- No minimum investment requirements.
- No 12b-1 fees are charged.
- Pays monthly dividends that are fixed and predictable.
Cons
- A 50% concentration in stocks may be too aggressive for some retirees.
- Higher 0.25% expense ratio.
- Total assets of $34.4 million, which is much smaller than the other funds.
More details
- 10-year annualized total return as of September 30: 3.31%.
- Minimum investment: $0.
Compare the best retirement income funds
| FUND (TICKER) | EXPENSE RATIO | MINIMUM INVESTMENT | FUND 10-YEAR TOTAL RETURN AS OF SEPTEMBER 30 |
|---|---|---|---|
Vanguard LifeStrategy Income Fund (VASIX) | 0.08% | $3,000 | 2.76% |
Vanguard Target Retirement Income Fund (VTINX) | 0.08% | $1,000 | 3.60% |
Fidelity Freedom Index Income Fund Investor Class (FIKFX) | 0.12% | $0 | 2.56% |
Schwab Monthly Income Fund Income Payout (SWLRX) | 0.21% | $0 | 1.90% |
Schwab Monthly Income Fund Flexible Payout (SWKRX) | 0.25% | $0 | 2.62% |
Schwab Monthly Income Fund Target Payout (SWJRX) | 0.25% | $0 | 3.31% |
Methodology
Our curated rankings of the best retirement income funds were created by applying a screen of several “must-have” metrics:
- Share class: All target-date funds on this list are available to retail investors and not restricted to institutional ones.
- Track record: Retirement income funds on this list must have at least a 10-year track record of performance.
- Expense ratios: All funds selected for this ranking have an expense ratio under 0.25% to ensure cost-effectiveness.
- Minimum investment: To qualify, a retirement income fund in this ranking cannot require a minimum investment higher than $3,000.
An experienced fund analyst selected the funds above, but they may not be right for your portfolio. Before purchasing any of these funds, do plenty of research to ensure they align with your financial goals and risk tolerance.
Why other funds didn’t make the cut
The dominant consideration behind our ranking methodology was a focus on minimizing fees. With all else equal, investment expense ratios are cut into investors’ expected returns. For retirees using a retirement income fund that isn’t focused on growth, keeping fees as low as possible is essential for ensuring adequate returns over time.
Accordingly, we set a cap of 0.25% for fund expense ratios and ensured that none of the funds we selected charged sales loads or 12b-1 fees. In the interest of accessibility, we also set a maximum $3,000 cap on the minimum initial required investments.
Next, we set parameters to focus on more long-standing funds. This meant checking for a minimum track record of at least 10 years in operation. This was done to weed out newer funds, which run a higher risk of being shut down due to a lack of investor inflows.
Final verdict
Retirement income funds can be a great all-in-one alternative for retirees looking to outsource the management of their investment portfolio. These funds are often highly diversified, charge low fees and aim to pay a consistent distribution to help retirees meet income needs.
Our pick for the best overall retirement income fund goes to the Vanguard Target Retirement Income Fund (VTINX). With roughly a 30% stock and 70% bond split, this fund skews toward the conservative side, favoring capital preservation and income instead of growth, which is ideal for retirees.
Unlike some other funds, VTINX features a decent short-term TIPS allocation, which can help mitigate the risk of inflation and interest rate risk. The fund is globally diversified on both the stock and bond sides and charges a low 0.08% expense ratio.
How to choose the best retirement income fund
“When you’re sizing up a retirement income fund, don’t be dazzled by the yield alone, as that’s like picking a pet based on its ability to play fetch,” Kovar said. “You’ve got to look at the total return, the fees and even the history of the fund manager.”
To choose the best retirement income funds, retirees should assess their financial situation holistically, which can include the following variables:
- Understand your income needs: Get an understanding of your income needs during retirement, which can include living expenses, healthcare needs and travel aspirations. Calculate a rough estimate of your yearly expenses in retirement and use that figure to determine how much monthly income you would need the fund to generate.
- Determine your risk tolerance: Your risk tolerance is another important consideration. Some funds may offer higher potential returns but come with higher volatility, which might not be suitable for individuals close to or in retirement. Striking a balance between risk and reward is critical when choosing a retirement income fund.
- Understand the fund’s payout structure: Retirement income funds can vary in their payout structure. While some funds provide variable dividends, others may pay out a fixed monthly amount, while some could offer a combination of both. Make sure the payout structure aligns with your income needs and preferences.
- Check the fees and expenses: Always pay attention to the fees and expenses associated with any investment. High fees can erode your returns over time. Aim for funds that have reasonable expense ratios and no hidden fees.
- Assess the fund’s reputation: The reputation and track record of the fund manager can be a good indicator of the fund’s potential performance. It’s best to look for fund managers with a history of sound financial decisions and successful fund management.
- Ensure adequate diversification: Diversification helps mitigate risk by spreading investments across various asset classes. Ensure your chosen retirement income fund invests in a broad mix of assets to reduce market volatility.
- Check for tax efficiency: Different types of funds can have varying tax implications. For instance, some funds generate income that might be subject to higher ordinary income tax rates, while others may produce more long-term capital gains or qualified dividends, which could be taxed at lower rates. Some funds might also be more efficient in tax-sheltered accounts like a Roth IRA or 401(k), while others might be more suitable for taxable accounts.
Remember, there’s no one-size-fits-all approach to choosing the best retirement income fund. Your circ*mstances, financial goals and risk tolerance will shape the best choice for you. Always consider seeking professional financial advice tailored to your specific situation.
Frequently asked questions (FAQs)
Retirement income funds and traditional mutual funds serve different financial objectives. Traditional mutual funds are versatile investment vehicles that pool together money from multiple investors to purchase a diversified portfolio of stocks, bonds or other assets. They can be structured to meet a variety of investment goals such as growth, income, capital preservation or a combination of two or more.
On the other hand, retirement income funds are designed specifically with the needs of retirees in mind. These funds are structured to provide a steady stream of income for individuals in their post-career years and are often more conservative in their investment strategies to preserve capital. In general, they forgo growth for higher income potential.
The amount you should invest in retirement income funds depends on various factors, including your current age, risk tolerance, retirement goals and whether or not you’ll have other sources of retirement income like Social Security, pensions or annuities. The key is to ensure that your investment aligns with your retirement income needs and risk profile. Remember that retirement income funds are not risk-free and their yield is not guaranteed.
While retirement income funds can be a valuable part of a retirement plan, relying solely on them may not be the best strategy. Diversification is key to managing risk and achieving a balanced financial portfolio. This means spreading your investments across a variety of asset classes.
Therefore, other assets like Social Security, pensions or annuities can play a significant role in your retirement income strategy. Retirement income funds should ideally be used to supplement these other income sources to help ensure a comfortable and secure retirement.
Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.
Blueprint has an advertiser disclosure policy. The opinions, analyses, reviews or recommendations expressed in this article are those of the Blueprint editorial staff alone. Blueprint adheres to strict editorial integrity standards. The information is accurate as of the publish date, but always check the provider’s website for the most current information.
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Tony Dong is a freelance financial writer with bylines in U.S. News and World Report, the NYSE, the Nasdaq, The Motley Fool and Benzinga. He lives in Vancouver, Canada and is an avid watch collector.
BLUEPRINT
Farran Powell is the lead editor of investing at USA TODAY Blueprint. She was previously the assistant managing editor of investing at U.S. News and World Report. Her work has appeared in numerous publications including TheStreet, Mansion Global, CNN, CNN Money, DNAInfo, Yahoo! Finance, MSN Money and the New York Daily News. She holds a BSc from the London School of Economics and an MA from the University of Texas at Austin. You can follow her on Twitter at @farranpowell.
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