Retirement Fund Investment: Choosing The Right Path

Choosing the right fund for retirement is a tricky decision and generally one that shouldn't be made without first seeking independent financial advice. There are thousands of investment funds available, offering a wide range of options and levels of risk.

If you have a workplace pension, your employer may offer you a default investment fund. This is designed to reduce risk as you approach retirement age and is for people who don't want to make their own pension decisions. However, you may be able to choose an investment fund yourself, depending on the terms of the scheme.

If you have a personal pension, you'll have a say in how your money is invested. Your pension provider will offer a range of investment funds that are designed to invest your money in different ways over the years until your retirement. You'll probably be offered a choice of funds that specialise in specific assets or a mix of different assets. Most people choose to invest their pension in a blend of assets to manage risk.

As a rule, it makes sense to spread your money across different assets, sectors or geographic regions. Many basic managed funds do this for you, but if you want to take a more active role, you can start by looking in detail at how you spread your risk across a range of investments.

You should also consider your 'investment style' and what you feel comfortable with. For example, if you have a low aptitude for risk, you'll want to invest in lower-risk assets. If you have a high tolerance for risk, you may be happy to invest in higher-risk assets for potentially higher returns.

Retirement funds are a set it and forget it option that removes the headache of deciding on a mix of assets and rebalancing those investments over time. They are designed to continually strike the right balance between the risk necessary to build wealth and safer bets to protect a growing nest egg.

Balanced funds that own stocks and bonds

One of the most well-known balanced funds is the Vanguard Wellington Fund (VWELX). This fund is the oldest balanced mutual fund, having launched in 1929. The VWELX fund tends to allocate up to 70% of its portfolio to stocks and the remainder to bonds, focusing on high-quality, large-cap companies with a dependable history of dividend growth. As of 2024, the fund's portfolio consists of roughly 65% stocks, 33% bonds, and the rest in cash equivalents. The expense ratio for this actively managed fund is also relatively low.

Another option is the Schwab Balanced Fund (SWOBX), which offers a mix of U.S. and international stocks, as well as U.S. fixed-income assets. This fund provides more exposure to small-cap and growth stocks, offering a better chance for capital gains but with slightly more risk. There is no minimum investment required to get started with the SWOBX fund, making it accessible to a wide range of investors. The fund has consistently outperformed its Morningstar category average over the last 15 years.

The American Funds Tax-Aware Conservative Growth and Income Portfolio (TAIFX) is another well-regarded balanced fund. This fund aims to provide appreciation and income, with a portion being exempt from federal income tax. The TAIFX fund holds positions in six other mutual funds, with an asset mix of roughly 35% in U.S. stocks, 12% in foreign stocks, 45% in U.S. fixed income, and 8% in cash equivalents. While this fund has a $250 minimum initial investment, it has outperformed its Morningstar category average over the past one, three, five, and ten years.

When considering balanced funds for retirement, it is important to assess your risk tolerance and understand the different types of asset allocation models available. Additionally, researching each fund's performance, fees, and seeking guidance from a financial advisor can help you make an informed decision.

Fixed income funds that invest in bonds

Fixed-income funds that invest in bonds are a good option for retirees who want to balance their need for income with their desire to keep generating growth. These funds can provide stable cash flow after retirement, with the potential for modest capital appreciation.

When investing in bonds, individuals lend money to the issuer (e.g., government, corporation, or municipality) in exchange for periodic interest payments and the return of the principal amount at maturity. By investing in a broad portfolio of bonds, investors can spread their risk across different issuers, sectors, maturities, and credit ratings.

Mutual Funds

Mutual funds are a practical, cost-efficient way to build a diversified portfolio of bonds. Fidelity, for instance, offers various mutual funds, including taxable and tax-exempt bond funds, that can help diversify an investor's fixed-income portfolio.

Exchange-Traded Funds (ETFs)

ETFs are another option for investing in fixed-income securities. ETFs trade on an exchange, like stocks, and can be bought and sold throughout the trading day. Some examples of bond ETFs include:

• IShares Core U.S. Aggregate Bond ETF (AGG): Seeks to provide broad exposure to the U.S. investment-grade bond market, with over 70% invested in AAA-rated securities.
• Vanguard Total Bond Market ETF (BND): Aims to track the performance of a broad, market-weighted bond index, with about two-thirds invested in U.S. government bonds.
• IShares Floating Rate Bond ETF (FLOT): Seeks to track the performance of an index of U.S. investment-grade floating-rate bonds, making them attractive during periods of rising interest rates.

Separately Managed Accounts (SMAs)

Separately managed accounts are professionally managed bond portfolios built around a specific investment strategy. They can be personalized to meet an investor's preferences and integrated into their overall portfolio.

When considering fixed-income funds that invest in bonds, it's important to assess the fund's performance, fees, and how it aligns with your risk tolerance and investment goals.

Dividend stocks

When selecting dividend stocks for your retirement portfolio, look for stocks that have paid steady, increasing dividends for years (or decades), and have not cut their dividends even during recessions. One way to identify suitable candidates is to look for stocks with an average dividend yield of 3%, and positive average annual dividend growth. Many stocks increase dividends over time, helping to offset the effects of inflation.

• Ameren (AEE): Currently shelling out a dividend of $0.63 per share, with a dividend yield of 3.15%.
• New Jersey Resources (NJR): Paying out a dividend of $0.39 per share, with a dividend yield of 3.61%.
• Peoples Bancorp (PEBO): Paying a dividend of $0.39 per share, with a dividend yield of 5.7%.
• Caterpillar (CAT): The world's largest construction equipment manufacturer, Caterpillar has paid a cash dividend every year since going public in 1925 and has raised its dividend annually for 29 consecutive years. Its current quarterly dividend is $1.20 per share, equating to an annual yield of 2.12%.
• Hershey (HSY): Hershey has an impressive record of paying and raising its dividend, with a current quarterly dividend of $1.036 per share and an annual yield of 1.62%.
• Lowe's (LOW): Lowe's has paid and increased its dividend for 49 consecutive years and currently pays a quarterly dividend of $1.10 per share, representing a 2.1% dividend yield.

It is important to note that investing in dividend-focused mutual funds or ETFs may carry high fees, which could lower the overall gains from dividends. Therefore, it is advisable to look for funds with low fees if considering this approach.

Index funds

• Vanguard Total Stock Market Index Fund Admiral (VTSAX)
• Fidelity 500 Index Fund (FXAIX)
• Fidelity Total Bond Fund (FTBFX)

Mutual funds

Retirement income funds are a type of mutual fund that aims to provide regular income payments to retirees. These funds generally invest in stocks, bonds, or a combination of both, with a strong focus on dividends and interest income. The primary objective of these funds is to generate stable cash flow for retirees while also achieving capital appreciation.

When choosing a retirement income fund, it is important to consider your risk tolerance and investment goals. Some funds are more conservative, focusing on asset preservation and income, while others are more aggressive, prioritizing growth and taking on more risk. It is also important to assess the fund's performance, fees, and your own financial circumstances when making a decision.

• American Funds Tax-Aware Conservative Growth and Income Portfolio (TAIFX)
• Schwab Balanced Fund (SWOBX)
• Vanguard Wellington Fund (VWELX)
• Dodge and Cox Income Fund (DODIX)
• PGIM High Yield Fund (PHYZX)
• T. Rowe Price Dividend Growth Fund (PRDGX)
• Schwab International Index Fund (SWISX)
• Vanguard Long-Term Tax-Exempt Fund (VWLTX)
• BBH Limited Duration Fund (BBBMX)

Additionally, here are some other types of mutual funds that can be used for retirement investing:

• Balanced funds or asset allocation funds: These funds provide a combination of stocks, bonds, and cash, and can be tailored to different risk tolerances and investment goals.
• Fixed-income funds: These funds focus on generating stable and predictable returns through interest payments rather than market swings.
• Dividend-paying stock mutual funds: These funds invest in companies that pay dividends, providing a stable source of income.
• Money market funds: While these funds don't offer high yields, they can be an important piece of a retirement portfolio, especially for short-term needs.

Frequently asked questions