Nirav Shah, Wealth of Geeks
According to the Investment Company Institute (ICI) research findings, almost 69 million American households owned mutual funds. Interestingly, this figure represented more than 52% of households nationwide and 115.3 million individual investors. Households owning mutual funds belong to all income and age groups.
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Results of the study
The ICI study also reveals that almost all households owning mutual funds were focused on retirement savings. For many of these households, the first mutual fund was purchased as part of their retirement plan at work.
According to the study, the most commonly held type of mutual funds were equity funds, and a high percentage of the mutual fund owners were at the peak of their saving and earning years. Moreover, more than two-thirds of mutual fund-owning households earned less than $150,000.
At the time of the survey, baby boomers accounted for 51% of mutual fund assets held. In comparison, 36% of millennial mutual fund-owning households and Generation X mutual fund-owning households held their funds only through retirement plans sponsored by their employers. This percentage for baby boomers was only 22%.
Out of the 41.3 million American households headed by a member of the baby boomer generation, 56% owned mutual funds in late 2022. For the 35 million Generation X-headed households and 35.3 million millennial-headed households, this percentage was 55% and 47%, respectively.
In 2022, more than two-thirds and one-third of American households owning mutual funds had earnings less than $150,000 and $75,000, respectively.
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Why mutual funds?
Mutual funds are financial vehicles that invest shareholder assets in various securities, such as stocks, money market instruments, bonds, and other assets. Mutual funds are popular because they allow individual and small-time investors to access professionally managed portfolios such as bonds, equities, and other securities. Each shareholder participates proportionally in the fund’s profits as well as losses. Many large investment companies offer mutual funds, including Vanguard, Fidelity Investments, Oppenheimer, and T. Rowe Price.
In the United States, employer-sponsored retirement plans typically invest in mutual funds. It’s important to remember that individual investments and mutual funds are also subject to market fluctuations.
The inherent diversification of mutual funds makes them less volatile and safer. When a single company suffers loss or even fails, there is a significantly lower impact on investors associated with it through a mutual fund because their investment is spread across many such companies.
Some mutual funds function precisely to address the specific financial requirements of individuals saving for their retirement. The strategic approach of these funds can pave the way towards a steady and safe post-work income.
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Choosing the right retirement income fund
A Retirement Income Fund (RIF) may be called a well-diversified mutual fund in large and mid-cap bonds and stocks. These actively managed funds adopt a conservative approach to generate moderate growth for retirement assets, such as individual retirement accounts (IRAs). These funds are treated as regular mutual fund investments without special tax treatment.
Like any other mutual fund, these funds are also exposed to market-related factors, so no retirement income is guaranteed. Some retirement income funds offer quarterly or monthly distributions. These funds generally have a minimum investment requirement.
Where retirees are concerned, income generation is not a one-size-fits-all process. Based on their varying financial needs, life expectancy, and risk tolerance, retirees should create a robust retirement plan and explore multiple income streams.
The most appropriate retirement income plans can generate a steady stream of post-retirement income, preserve the capital, manage the individual portfolio hassle-free, and offer diversification benefits.
It’s essential to critically assess one’s financial situation to choose the most appropriate retirement income fund. Investors must understand the income requirements for retirement, including living costs, healthcare expenses, travel aspirations, etc., and it’s vital to balance risk and reward depending on the individual’s risk tolerance.
The fund manager should ensure the payout structure aligns with the retiree’s income preferences and requirements and understand that opting for funds with relatively low expense ratios and no hidden fees is always advisable. It’s also the fund manager’s job to assess varying tax implications for different funds and diversify assets by spreading investments across various asset classes. This helps mitigate risk.
It’s up to the investor to do their own checking and assess the reputation and track record of the fund manager.
Fidelity, also known as FMR LLC, offers a broad spectrum of financial services, including financial planning, brokerage, investment management, and wealth management services. As of August 1, 2023, the company had about $4.5 trillion under management and $11.7 trillion in total assets. The company has more than 10,000 exchange-traded funds and mutual funds that can be good options as retirement income funds.
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Where should the money go?
In the U.S., investors can access many tax-advantaged savings plans, including individual retirement accounts (IRAs), 401(k)s, and Roth IRAs. Many retirees now prefer Roth IRAs over other retirement savings plans because of the advantage of tax-free withdrawal of funds. Many industry experts recommend the Fidelity Total Market Index Fund (FSKAX) and the Fidelity U.S. Bond Index Fund (FXNAX) as excellent options for Roth IRA investments.
FSKAX looks to replicate the performance of a wide range of stocks represented by the Dow Jones U.S. Total Stock Market Index. The fund invests at least 80% of its assets in common stocks included in the index. Its holdings comprise both growth and value stocks of US-based large-cap companies. The fund has a low expense ratio of 0.015%.
On the other hand, FXNAX is another mutual fund replicating the Bloomberg Barclays U.S. Aggregate Bond Index’s performance, which comprises U.S. investment-grade bonds and other securities. Out of the 8,000-plus holdings of the fund, 39.5% are U.S. Treasury bonds, 25.2% are corporate bonds, 26.7% are pass-through mortgage-backed securities (MBS), and the rest are asset-backed securities (ABS), commercial MBS, and government-related, international and domestic debt securities.
As a fixed-income fund or broad-based bond, FXNAX is less risky compared to an equity fund. However, bond funds typically provide lower returns than equity funds. Therefore, it can be a good investment option for risk-averse retirees as part of their strategy for portfolio diversification.
In addition to these two, there are other Fidelity funds for retirement, including FNLIX, FXAIX, FSHCX, FDSVX, FNCMX, FBGRX, FOCPX, FSPTX, and many more.
