You can find plenty of recommendations on great funds for your portfolio before retirement, but what works once your saving is mostly complete and you’re drawing on the accounts? We asked several financial advisors for some fund recommendations for the retiree.
Our experts mostly liked Vanguard funds, for their low cost and high performance, and cautioned that any of those named below should be part of a balanced portfolio catered to your specific financial situation. Also, as you research these names, remember that just because a fund performed well in the past doesn’t mean it will in the future. Most of these funds received Morningstar’s five-star rating.
Key Takeaways
- Retirement shouldn't be the end of your investing journey.
- Consider investing in funds that provide you with a source of current income and charge low fees.
- Vanguard has a series of funds that are suited for retirees, including the Wellesley Income Fund Investors Shares, Wellesley Income Admiral Fund, Equity Income Fund Investor Shares, and Wellington FundInvestor Shares.
- Our experts like Vanguard's PRIMECAP Fund Investor Shares, which is no longer accepting new investments.
- The Dodge & Cox Stock Fund is another expert favorite because of its exposure to the stock market and low fees.
Tips for Finding the Best Funds for Retirement
Choosing the right investments depends on your financial position and personal situation. That same principle applies whether you're just starting out in the workforce or if you've already retired. But there are so many investment vehicles to choose from, so where do you start?
As you would at any point in your life, determine the following:
- Your risk tolerance
- Any sources of income (Social Security, other investments, any part-time or freelance work)
- Your time horizon and life expectancy (yes, this is important)
- What you want to achieve, whether that's long-term growth or current income
Keep in mind that your income may be limited, so you may not be able to assume as much risk as you were able to when you were working. You'll probably want to consider funds that provide you with a form of current income in order to supplement any benefits or investment income you're already receiving.
Another consideration is how much you'll spend on your funds. Mutual funds come with expense ratios or advisor fees, which are a percentage of your total investment. These fees are typically deducted from your account each year. The larger the fee, the more money you'll lose. And the type of fund you select will also factor into the fee you'll pay—actively-managed funds tend to have higher fees compared to passively-managed ones.
0.62% vs. 0.12%
The average expense ratio for actively-managed funds compared to passively-managed ones in 2020.
1. The Vanguard Wellesley Income Admiral Fund
- Expense Ratio: 0.16%
- Minimum Investment: $50,000
- AUM: $65.4 billion
CFP and founder of Prudent Wealthcare Gage DeYoung likes two Vanguard funds. The first is theVanguard Wellesley Income Admiral Fund (VWIAX). This is an income-oriented balanced fund that provides investors with exposure to both investment-grade bonds and equities. It has about 60% of its assets allocated to bonds and 38% to U.S. stocks. The rest is in short-term reserves.
VWIAX tracks the performance of the Wellesley Income Composite Index and has outperformed the benchmark. As of March 31, 2022, the fund's one-year and 10-year returns were 3.60% and 6.95%, respectively. The index returned 2.11% and 6.38% during those same periods.
2. The Vanguard Wellesley Income Fund Investor Shares
- Expense Ratio: 0.23%
- Minimum Investment: $3,000,
- AUM: $65.4 billion
The Vanguard Wellesley Income Fund Investors Shares (VWINX) is intended for individuals who want the same income-oriented balanced approach but can't or don't want to invest a whole $50,000 in one vehicle. It has the same asset weighting as its counterpart.
VWINX also tracks the performance of the Wellesley Income Composite Index. While the benchmark returned 2.11% and 6.38% in one year and 10 years, the fund returned 3.52% and 6.87% during the same periods.
3. The Vanguard Equity Income Fund Investor Shares
- Expense Ratio: 0.28%
- Minimum Investment: $3,000
- AUM: $53.8 billion
Scott Stratton, CFP and president of Good Life Wealth Management, likes the Vanguard Equity Income Fund Investor Shares (VEIPX). This actively-managed fund gives investors exposure to the stock market while providing them with a source of current income.
The fund invests in a total of 194 large-cap value stocks, which have a median market capitalization of $118.8 billion. While the majority of holdings are based in the U.S., 4.3% are in foreign companies.
VEIPX tries to match the performance of the Spliced Equity Income Index, which it has consistently outperformed. It returned 15.35% compared to the index's 14.49% in one year. In 10 years, it returned 12.34% while the fund returned 12.27%.
4. The Vanguard Wellington Fund Investor Shares
- Expense Ratio: 0.24%
- Minimum Investment: $3,000
- AUM: $117.9 billion
Most retirees will find that a 90% weighting toward stocks is too high, but they’re likely to have other funds to balance it out.Another of Stratton’s favorites is the Vanguard Wellington Fund Investor Shares (VWELX). This is the company's oldest mutual fund and, according to Vanguard, America's oldest balanced fund.
Roughly 65% of the portfolio is invested in large-cap value stocks with a median market cap of $184.3 billion. About 34% is in mid-term investment-grade corporate bonds. The remaining holdings are in short-term reserves. The benchmark for this fund is the Wellington Composite Index. The one-year and 10-year returns for the fund were 7.63% and 9.84%, which were just under the index returns at 8.45% and 10.65% for the same periods.
Stratton gives this caution to retirees: “Many retirees seek out a fund with the highest yield, but that’s often a mistake. Funds with the highest yield are often less diversified and (have) higher risk than funds with a more average yield. In the long run, the highest yielding funds often underperform and frequently have larger losses in bear markets because they tend to be concentrated in just a few sectors.”
5. The Dodge & Cox Stock Fund
- Expense Ratio: 0.52%
- Minimum Investment: $2,500 (initial) with $100 minimum subsequent investment
- AUM: $98.9 billion
The Dodge & Cox Stock Fund (DODGX) is another favorite of advisors. It is primarily invested in equity holdings with a focus on medium-to-large companies that are well-established.
The majority of the fund is invested in stocks—almost 98%. As such, it may not be well-suited for most retirees, but it may work in a balanced portfolio. The remaining is held in cash and other assets. The top sectors of the fund are financials, health care, and information technology.
The fund returned 14.84% to investors after one year and 14.25% after 10 years. This is compared to the performance of the underlying indexes, the and the Russell 1000 Value Index, which returned 15.65% and 11.67% after one year and 14.64% and 11.70% after 10 years, respectively.
6. The Vanguard PRIMECAP Fund Investor Shares
- Expense Ratio: 0.38%
- Minimum Investment: closed to new investors
- AUM: $70.6 billion
Vanguard is no longer accepting new investments for its PRIMECAP Fund Investor Shares (VPMCX) fund but it remains a favorite with our experts. It has a long-term perspective with a focus on mid- and large-cap stocks.
There are a total of 169 stocks in the fund's portfolio with a focus on information technology, health care, and industrials. The median market cap of stocks in the portfolio was $147.9 billion.
VPMCX tracks the performance of the S&P 500. While it underperformed the index in one year (5.53% versus 15.65%), it did outperform its benchmark after 10 years, returning 15.82% compared to 14.64%.
What Is the Best Investment When You Retire?
The best types of investment for retirees are those that provide a form of income and provide a low level of risk. Examples include bonds, real estate investment trusts, stocks that pay dividends, mutual funds, and life insurance. Although the interest they pay may be relatively low, savings accounts and certificates of deposit are safe and highly liquid investments. Consult a financial professional before you make any decisions.
Are Mutual Funds Good for Retirees?
Mutual funds are investments that are managed by portfolio managers. They pool money together from multiple investors. This capital is invested in different securities, giving investors exposure to different assets. As such, they can be a great investment for retirees. That's because these investment vehicles are designed to help investors preserve their capital and minimize their risks.
Where Should I Put My Money After I Retire?
Retirement doesn't mean the end of your investment journey. You'll still need to invest and make changes to your portfolio. Consider putting money into vehicles that provide you with a steady source of current income, such as mutual funds, dividend-paying stocks, bonds, and real estate investment trusts. You can also choose highly liquid assets like savings accounts and certificates of deposit. But with any investment decision you make, consult a financial professional to weigh out all your options.
The Bottom Line
Remember that you shouldn’t go out and buy these funds because of our recommendation. Research the funds, and then talk to a financial professional before buying in. In addition, because many of these funds are highly weighted in stocks, you should add these to a portfolio of other funds that might be more weighted toward bonds or safer investments. A financial advisor can help you properly weight your portfolio and avoid any overlap of investments in each fund.
