Retired people face three considerations when investing in mutual funds: life expectancy, inflation and interest rates. The typical retiree leaving the workforce at age 65 can expect to live another 19 years. This means that retirement income needs to last more years than many retirees may expect. Meanwhile, inflation during retirement negatively affects the value of future investment returns, and low interest rates stall wealth accumulation. Thus, the best mutual funds for retired people provide safety and income, as well as some capital appreciation.
Money Market Funds
Some of the safest and most convenient mutual funds for retired people include money market funds. These funds pay monthly dividends regardless of fluctuations in the stock market, and they invest in U.S. government and corporate bonds as well as certificates of deposit. While their returns tend to be low, these funds offer stability and quick access to money, usually through check-writing privileges.
Bond funds offer retired people broad access to the bond market. These funds help conserve some of the income you bring into retirement while producing a consistent return that adds to your other sources of monthly income. Bond funds typically invest in corporate bonds, mortgage-backed securities, municipal bonds and U.S. Treasuries, all of which offer less investment risk than stocks. Bond funds respond to interest rate fluctuations, so you may see your bond income increase slightly when interest rates go down or fall slightly when interest rates rise.
Income-producing funds include mutual funds that provide distributions from dividend-paying stocks. While many funds generate income throughout the year that's paid out as dividends on a quarterly, semi-annual or annual basis, some mutual funds focus entirely on dividend-producing stocks. Such mutual funds usually have the word "dividend" in their names as well as "appreciation" or "growth." These funds guarantee dividend payments, which is a plus for retired people, but their overall returns depend on market performance.
Other Equity Funds
Maintaining some portion of a portfolio in other equity funds helps ensure capital appreciation over the many years that most retired people will need money. Large-cap funds that invest in U.S. blue chip companies offer the opportunity for long-term capital growth. Total stock market mutual funds are another option that provides exposure to the entire U.S. market and helps you take advantage of returns during bull markets.
Asset allocation among mutual funds presents a challenge for retired people. While you may want to protect your assets with safer funds, too much protection means you could lose out during winning streaks in the stock market.
There is no "one size fits all" asset allocation in retirement, as investors all have different financial means and risk tolerances. However, a moderate asset allocation might consist of 60 percent stocks, 35 percent bonds, and 5 percent cash. A more conservative allocation might run along the lines of 50 percent bonds, 30 percent cash and 20 percent equities.
An experienced adviser can help you determine allocations that make sense for your risk tolerance and retirement horizon. Online research tools offered by Morningstar and Zacks Investment Research also can help you determine the characteristics of equity funds that interest you.
- Financial Web: How Do Bond Funds Work?
- Investor guide: 10 Different Types of Stock Mutual Funds
- U.S. Securities and Exchange Commission: Bond Funds and Income Funds
- Charles Schwab: Retirement Portfolio Allocation
- Centers for Disease Control and Prevention: Healthy Aging in Action
- FINRA: Money Market Accounts and Money Market Funds
- FINRA: Mutual Funds