Be careful of high income risks
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 payment at any time, the payments are often not fixed. And since mutual funds have no maturity date, the return of the principal is not assured. Finding out how some income funds or portfolios calculate the monthly payout can be confusing. Some pay out a return of capital while others payout mostly interest income. Some payout dividend income and even still, others payout capital gains. Some may claim they are tax-efficient, but at what risk to your capital? Look to see what the income has consisted of for 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 the more conservative and consistent. If they have a solid component of interest income, then you know they may be holding bonds that have monthly or quarterly interest payments. These payments will be more predictable and less volatile. They will also give you comfort knowing it is more of a regular income pattern.
Whether you are investing in stock, 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 the income payout is calculated so you understand what to expect or ask your financial advisor.