Are Mutual Funds a Good Investment for Retirees?

While any good financial adviser will tell you that mutual funds should make up a portion of your financial portfolio, many wonder if the investing strategies should change once you retire. For example, should retirees continue to invest in mutual funds?

Mutual funds should be a part of every financial portfolio, but retirees should select dividend mutual funds because they provide income and carry even less risk than growth mutual funds.

The rest of this article will explain a few topics related to this question, including differences in mutual funds, ways retirement situations differ, and how those differences impact investing strategies. We’ll also share a few ways to educate yourself before seeing your financial advisor. 

Aren’t All Mutual Funds the Same?

Many people invest a portion of their salary each month in hopes of making their money grow faster than it can in a traditional savings account. This approach helps make retirement years more manageable financially, and mutual funds are almost always a part of the investment strategy.

Most workers know social security will not be enough for the lifestyle they want during retirement. In addition, many have weak retirement programs where they work—assuming they have a retirement program at all. 

Therefore, today’s workers must invest their money using various strategies based on financial objectives and risk tolerance. During retirement, those strategies change, but investing does not stop.

Mutual funds are made up of a balance of stocks, bonds, and cash, so when one investment area experiences a downturn, the others offset the losses. 

As such, they are enticing because they simplify diversification, particularly when you are first starting. And they continue to be a good investment for retirees for the same reason.  

The only mutual fund change that retirees should consider is the type of fund they choose. But mutual funds are good investments for retirees because they offer a stable income to help fill gaps that social security and employer retirement plans leave.

Although mutual funds remain solid investments for retirees, you must do your research and select funds that align with your risk tolerance and financial goals. Not all mutual funds are created equally, and each retirement situation is different.

Mutual funds break down into many types and categories, but we are interested in the difference between growth funds and value funds for this article. 

• Value Funds are also called dividend funds. These funds are safer for retirees because they are invested in stocks that sell at a lower price. They also provide dividend payments to you, which supplement the income you have. 
• Growth Funds are more aggressive investments that carry more risk. They may have higher performance, but they are often not the best choice for retirees. First, the risk is higher, but more importantly, dividends are provided to investors in the form of price appreciation rather than as a check to the investor or reinvestment into the fund.

Still, no two financial objectives are the same, so you must determine your financial goals as a retiree before changing your investment strategy.

Consider Your Unique Retirement Situation

Every retiree’s situation is different, and your risk tolerance may change by the time you reach retirement. Nevertheless, mutual funds will likely remain a good investment by then. 

For example, you may have chosen the military as your career path at eighteen, served twenty years, and are now retired with full benefits. When you can retire at thirty-eight, mutual funds are still a good investment, but you have time to focus your portfolio on growth funds, and you can still absorb a certain level of risk.

Others will be much older yet still healthy enough to work at least part-time. Thus, a mix of growth and value funds may still be a safe bet in this scenario.

Still, another group of individuals will be older and unable, or perhaps unwilling to work any longer. In this case, money from your savings and investments will be all that can supplement your social security or pension so that value funds may be in your best interest. Even in this case, mutual funds remain a good investment even for this retiree situation.

Other situations can impact the type of mutual fund you focus on as well. 

For example, you may have paid off your home and vehicles and entered retirement debt-free so that your social security and pension funds cover your daily needs. Still, you may want income for extra things like trips and gifts for grandchildren. Even in this case, mutual funds are a good option for retirees.

In any given situation, as a retiree, you are most likely at the point in your financial journey where you are finally withdrawing from your life savings, and good for you! This financial security is what you have saved for—a retirement free of financial burdens.

Even so, now is not the time to let your financial guard down. Instead, it is just time to shift your focus accordingly, and most will change that focus from growth to income and preservation of wealth.

While no investment is 100 percent secure, historically, mutual funds are less risky, and most financial analysts urge investors to keep these funds as part of a diversified portfolio. 

Either way, investing in retirement will be a balancing act, and even if you have managed your portfolio on your own, you may want to ask for help from financial authors and advisors. Following are some books from Amazon that we like:

• Investing Before During and After Retirement is a guide for retirement investing and focuses on the idea that you do not stop investing at retirement. You just change your strategies.
• How Much Can I Spend In Retirement? This book helps you determine your spending rate in retirement to enjoy your later retirement years. It also discusses risk tolerance and lifestyle changes. The book is research-based, and at 362 pages, it is part of a three-book set written by an economics professor who completed a Ph.D. in Economics from Princeton University.
• The New Retirement Savings Time Bomb walks you through how to avoid costly mistakes, particularly mistakes where taxes are concerned.
• The Smartest Retirement Book You’ll Ever Read is an easy read, with the primary purpose is to make sure your money lasts longer than you do so that you do not leave your partner in a bad financial situation.
• Nest Egg Care is another book to help you make sure your financial portfolio is never depleted. 

We’ve also researched some of the best value funds, according to USA News Money. Our top three picks from their list are:

1. Bridge Builder Large Cap Fund (BBVLX), which invests in investment companies.
2. T Rowe Price (TRVLX), which invests in companies like JP Morgan and General Electric
3. Vanguard Equity Income Fund (VEIPX), which invests in undervalued large-cap stocks.

Educating yourself through reading and researching mutual funds is a great first start. Still, I would also highly encourage seeking a professional financial adviser that you are comfortable with before changing any investment strategy.

I am confident your adviser will agree that mutual funds are a good investment for retirees and that they will suggest the mutual fund that is best suited for unique needs and risk tolerance. 

Conclusion

Investing for retirement is one of the most competent actions you can take for your financial health, but investing does not stop once you retire. Mutual funds remain a good investment for retirees, and they can provide much-needed income to fill in the gaps social security and pension programs may create.