Want $100,000 of annual retirement income? Without cannibalizing your principal? If you choose wisely, mutual funds will get the job done.
These funds also help you answer the core retirement planning question: "How much money do I need to save for retirement?"
One thing the answer depends on, of course, is how much money you plan to spend each year in retirement. So let's say you want $100,000 of annual retirement income.
Mutual Funds That Do The Trick
Under today's rules, you can expect to get $36,897 a year in Social Security benefits, according to a Bankrate.com calculator.
That assumes you are 50 years old now, earning $82,774 and retiring at age 70 when your income will hit $100,000. Age 70 is also when your Social Security benefits top out. Delaying retirement beyond that alone won't boost your annual benefits.
So if you want $100,000 in yearly retirement income, that means your savings and investments must provide the balance of $63,103.
Various mutual funds can meet that goal.
Mutual Funds That Generate Income
Let's say you want to meet this need solely with the diversified portion of your retirement savings portfolio. Those include your mutual funds. Let's also say that you want to do this with yield alone, rather than eating into your balance.
Which mutual funds can get the job done?
The answer depends in large part on how much volatility you're willing to put up with. The smaller your retirement nest egg is, the higher its yield must be to generate the $63,103 that you need. Just remember, the higher the yield, odds are the more volatile its performance will be. It will suffer more stomach-churning ups and down.
Keeping Pace With The Broad Market
Suppose you want to generate the $63,103 with one or more mutual funds that track the broad stock market in the form of the S&P 500. The $246.8 billion Vanguard 500 Index Investor Fund (VFINX) currently has a modest trailing 12-month yield of just 1.43%, according to Morningstar Direct.
At that rate, you'll need a balance of about $4.413 million.
That's more than a lot of people expect to save for retirement. Workers with 401(k) accounts tell Charles Schwab they believe they'll need $1.7 million for retirement.
And actual savings tend to be more modest. For people age 65 and older, the average 401(k) account balance in plans overseen by Vanguard is just shy of $280,000.
Yield Plus Low Volatility
What if your portfolio of mutual funds is in fact growing into a smaller multimillion-dollar nest egg? In retirement, you could put some or all of it into $57.8 billion Vanguard Dividend Appreciation Index Adm (VDADX).
It tracks common stocks that have increased dividends for at least the past 10 years. Its trailing 12-month yield is 1.91%.
At that pace, you still need a balance of about $3.305 million to generate $63,103 a year.
The better news? Over the three years ended Aug. 31, the fund rose 82% for every 100% gain by the S&P 500. But it lost only 84% as much as the index in any decline.
So, the fund tended to gain less than the benchmark but its ride was smoother. And its losses were smaller.
Higher Octane Mutual Funds
If that's more than you're on track to amass, you'll likely have to consider mutual funds with higher octane yields.
The $1.8 billion Fidelity Multi-Asset Income Fund (FMSDX) has a trailing 12-month yield of 3.43%.
The fund invests in a wider variety of securities than Vanguard Dividend Appreciation does. Some of the Fidelity fund's holdings are slightly more volatile. To make up for that, their yields are higher.
The fund invests in stocks and bonds. Its holdings can include preferred stock, which combine traits of stocks and bonds. For one thing, they generally have lower priority than traditional bonds when it comes to making payouts to investors. To make up for that risk, investors demand higher yields.
The fund also invests in debt securities below investment grade as well as floating rate securities, convertible securities and foreign securities.
With a 3.43% trailing 12-month yield, you reach your target of $63,103 of annual income with a balance of about $1.84 million. That's just a little more than most Schwab 401(k) members, for example, expect to need.
Moderately Exotic Holdings
What if your mutual funds are on track to be worth a little over $1 million? You can still generate enough income if you can put up with the risks of high-yield investing.
The $17.9 billion BlackRock High Yield Bond Fund (BHYSX) has a trailing 12-month yield of 5.12%.
The fund invests mainly in bonds below investment grade that have maturities of 10 years or less. The fund typically invests at least 80% of its assets in high yield bonds, including convertible and preferred securities.
For taking on more risk, you get higher yield. With a 5.12% trailing 12-month yield, a balance of about $1.232 million would generate $63,103, your yearly investment income target.
Miller Time
You can even reach your $63,103 annual income target with a balance of less than $1 million. Again, remember that a smaller balance means taking on one or more mutual funds with higher volatility.
The $159.7 million Miller Income Fund (LMCLX) holds mixed assets. It aims for having 75% to 80% of its portfolio in stocks. It had 72% in stocks as of June 30. Almost all of the rest was in fixed income.
Managers are Bill Miller IV and his father. Bill Miller III founded the fund's parent firm Miller Value Partners. Also, the senior Miller was manager of Legg Mason Opportunity Trust during its celebrated run of beating the S&P 500 for 15 years in a row, 1991 through 2005. The fund (LMOPX) is now part of the Miller complex.
Miller Income invests across asset classes and geographic markets. Reflecting its managers' value orientation, it aims for securities that are undervalued. It also aims for securities that dish out income.
The fund's I-class shares' trailing 12-month yield is 7.02%.
At that pace, a balance of just $898,904 would generate your $63,103 annual income goal.
Bear in mind that the fund's total return so far this year was -30.93% vs. -22.42% for the S&P 500.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and strategies of the best mutual funds.
