Some retirees are not aware of all of their opportunities for a regular fixed income, or they misunderstand the income investments they already own. For example, many have purchased income mutual funds but these can lack two features that many retirees seek–a fixed regular income and return of principal at maturity.
Since income mutual funds may change their dividend payments at any time, the payments are often not fixed. Also, since mutual funds have no maturity date, there is no guarantee for the return of principal. Finding out how some income funds or portfolios calculate the monthly payout can be confusing. There are income funds or portfolios that pay out a return of capital while others pay out mostly interest income. Some pay out dividend income and others pay out capital gains. Some may claim they are tax-efficient, but at what risk to your capital?
Examine the fund’s record over the past five years. Is it consistent year after year, or does it all depend on the manager’s discretion and performance? This will help separate the riskier income investments from those that are more conservative and consistent. If they have a solid component of interest income, they are likely to be holding bonds that have monthly or quarterly interest payments. These payments will be more predictable and less volatile, and they will provide comfort in the knowledge that they have a more regular income pattern.
Whether you are investing in stocks, bonds, or mutual funds, always make sure to do your homework first. If you are considering an investment in any type of mutual fund, carefully consider investment objectives, risks, charges, and expenses before investing. For this and other information about any mutual fund investment, always obtain a prospectus and read it carefully before you invest. Find out how to calculate the income payout so you understand what to expect, or ask your financial advisor.
Do or do not. There is no try. – Yoda
As I grow older, I pay less attention to what men say. I just watch what they do. – Andrew Carnegie
Published with permission from Grant Hicks