Your funds are automatically distributed among a diverse range of stocks and bonds when you invest in a balanced fund. Typically, a balanced fund may define an allocation for various investment categories, such as 60% equities and 40% bonds. Following that, the fund managers strive to adhere closely to that allocation.
If you have the right risk tolerance and investment objective, this moderate-risk strategy can be successful for those who are retired or close to retirement, but volatility is still a danger.
The tax repercussions of owning a balanced fund are a vital consideration. If funds are held outside of a tax-qualified retirement plan, the fund will make capital gains distributions at year’s end, which could have a negative effect on your tax strategy. These taxable occurrences may be avoided by owning individual ETFs or stocks in the proper ratio with fixed income instruments, especially if they are not held in a retirement account.
Here are some advantages and disadvantages to consider as you plan for your later years if you are thinking about using a balanced fund for retirement.
- Your funds are automatically distributed among a diverse range of stocks and bonds when you invest in a balanced fund.
- This approach to diversification lowers the danger of choosing the incorrect asset and is a cheap way to do it.
- This strategy may come with greater costs and provide you with less control over your portfolio than if you used individual index funds.
- It might make sense to start using some of the money from the funds to invest across a variety of different types of accounts as your portfolio size increases.
Some Benefits of Balanced Retirement Funds
You don’t have to choose your own stock or bond funds; you can hold a fund where the management picks the underlying investments for you. By acquiring a wide variety of fund-specified investments, the bond and stock components will both be diversified. This approach to diversification lowers the danger of choosing the incorrect asset and is a cheap way to do it.
The management staff of a mutual fund is in charge of doing due diligence on and choosing investments for the fund. Additionally, they handle all of the daily monitoring and investment modifications. As a result, you will spend less time conducting research and more time developing your expertise in stock and bond investing.
By using a managed balanced fund, you can quickly add or remove money from the fund, giving you more time to work or unwind.
When you have limited cash to invest or if you don’t understand investing very well and don’t want to engage a financial counselor, balanced funds can be helpful. The “expense ratio” represents the cost per unit of investment for the fee charged for managing a mutual fund. The cost is directly deducted from the overall value of the mutual fund; you will never see it. Learn how mutual fund expenses operate before investing in a fund, and pick investments with lower than average fees.
A balanced fund in retirement enables you to effortlessly take systematic withdrawals while keeping the right asset allocation. This strategy might be effective for those who just have one account to draw from, such as someone who wants to withdraw $400 every month from an IRA holding $100,000.
A few drawbacks to balanced funds
Because the fund management team is choosing the underlying mix of stocks and bonds and altering it as necessary, the fees in a balanced fund might occasionally be slightly higher than if you choose individual index funds (funds based on an index, such as the Standard & Poor’s 500 index).
You are unable to control how much of a balanced fund is allocated to international stocks, small-cap stocks, large-cap stocks, or government, corporate, or high-yield bonds; the fund managers will make that decision. The entire point of investing in shares of a managed balanced fund is that those asset class decisions are made on your behalf.
You need to be able to trust the managers of your funds with your money, so you should choose them wisely.
Managing Your Portfolio’s Size
It can make sense to start using some of the funds from the funds to invest across several different types of accounts as your portfolio size increases throughout the accumulation phase (the phase where you are contributing to and developing your assets).
The standard financial advice is to have your portfolio’s stock percentage equal to 100 minus your age (known as the 100 minus your age rule). This guideline states that if you are 50 years old, 50% of your assets should be in stocks. 1. By doing this, you can move your money out of equities as you age, reducing the risk of an increasing portion of your investments while keeping the balance in assets that yield income.
If you have a larger portfolio and multiple types of accounts during the distribution phase (when you are typically retired and accessing the money in the account), you might want to use a bond ladder to align the bond portion of your portfolio in each account with the number of withdrawals you will need from that account. When you start to think about retiring, you may need to roll the account into an investment with higher liquidity because you can’t do this with a balanced fund.