Ah, retirement. No more deadlines, endless meetings or conference calls—you’re finished with the working life. But that also means no more paycheck. Now one of your biggest financial worries is how to convert your nest egg into an income stream.These days, Target Retirement Income holds five funds, four of which are the firm’s biggest index funds: Total Stock Market (VTSMX), Total Bond Market (VBMFX), Total International Stock Market (VGTSX) and Total International Bond Market (VTIBX). The fifth fund is Vanguard Short-Term Inflation-Protected Securities Index Fund (VIPSX), an actively managed bond fund that invests in Treasury inflation-protected securities. All told, Target Retirement Income has 70% of its assets in bonds and 30%% in stocks. It returned 5.2% annualized over the past 10 years, and it currently yields 2.0%. (Returns and yields are as of April 11.)
Risks: Though retirement income funds are conservative, they are vulnerable to all the usual risks associated with owning stocks and bonds.
Dividend growth stocks
What they are: Shares of companies with a long track record of consistently raising their dividends. Stocks in these kinds of firms have held up better than Standard & Poor’s 500-stock index in past market downturns, according to a new study by David Mazza, at State Street Global Advisors. And although stocks with rapidly expanding dividends aren’t usually the biggest yielders, they do provide some income.
Our favorite dividend-growth mutual fund is Vanguard Dividend Growth (VDIGX), a member of the Kiplinger 25, the list of our favorite no-load, actively managed mutual funds. Manager Donald Kilbride invests in high-quality firms that he thinks can and will raise their dividends over time. Over the past 10 years, Dividend Growth returned 8.7% annualized, compared with 7.0% annualized for the S&P 500. The fund yields 2.0%.
Among ETFs, we like Schwab US Dividend Equity (SCHD), which invests in 100 firms that have paid dividends for at least 10 years and rank well with respect to several fundamental factors that measure a company’s soundness, including dividend yield and five-year dividend growth. The fund, which is a member of the Kiplinger ETF 20, the list of our favorite exchange-traded funds, yields 3.1% and charges just 0.07% in annual expenses.
Risks: They may pay dividends, but they’re still stocks. When the S&P 500 lost 55.3% between October 2007 and March 2009, Vanguard Dividend Growth held up better—but still cost its shareholders 42.3%.