Retirement income funds can make withdrawals simple

Now that you've retired, you can settle down to the kind of life you've always wanted: parked in front of a glowing computer screen, checking yields and interest rates, and fretting whether your retirement portfolio has the right mix of stocks, bonds and money market funds to sustain a 5% withdrawal rate.

No?

If not, your fund company may have a solution for you: a retirement income fund. Whether that solution is right for you is another question.

Retirement income funds come in two varieties. One is an all-in-one portfolio designed to throw off income from an age-appropriate mix of stocks, bonds and other securities. The other promises to give you managed withdrawals of both earnings and principal that will last long enough to see you through retirement.

Let's start with the all-in-one variety. The largest is Vanguard Target Retirement Income (ticker: VTINX), which clocks in with $11.5 billion in assets. Current yield: 1.82% — roughly the same as a 10-year Treasury note.

The fund is a fund of funds. Its U.S. stock holdings — about 21% of the portfolio — stem from Vanguard Total Stock Market Index fund. Its foreign holdings are from Vanguard Total International Stock Index fund. Its bond holdings, about 65% of the fund, come from Vanguard's bond index funds.

The past 10 years, the fund has gained an average 5.37% a year. Thanks to Vanguard's low-fee structure, the fund has an ultra-low expense ratio of just 0.16%.

Fidelity Freedom Income, its next-largest rival, weighs in at $2.5 billion and takes a similar fund-of-funds approach. Its mix is about 19% cash, 25% stocks and 56% bonds. Current yield: 1.72%. The fund charges 0.49% in expenses, although its cousin, Fidelity Freedom Index Income (FIKFX) charges just 0.16%. Index Income's yield is higher (1.94%), too.

These types of funds are geared to remain relatively stable, which is vital for people who are taking withdrawals in retirement. For example, Vanguard's Target Retirement Income fund's worst year-long performance was a 15.9% loss the 12 months ended in February 2009. To put that in perspective, the stock market benchmark Standard & Poor's 500 index lost 43.3% the same period.

But these funds still leave you with the problem of figuring out how much to take each month for withdrawals — a complex calculation that depends on your mix of assets and your longevity. This is where managed payout funds come in.

Like retirement income funds, managed payout funds try to create a good balance of stocks and bonds to generate income. Unlike retirement income funds, managed payout funds set a monthly distribution amount and send it to investors, typically for 12 months. After 12 months, they re-evaluate the amount they can distribute and reset the payout.

Schwab Monthly Income Moderate Payout fund (SWJRX), for example, aims for a 1% to 3% annual payout from the fund when rates are low, and 3% to 6% when rates are high.

Fidelity Advisor Income Replacement 2042 (FARFX) takes a similar approach, but with a twist: The fund aims to have distributed all of its funds by 2042. A $100,000 investment would get $508 a month in distributions, equal to about a 6% payout.

All the managed payout funds aim to keep up with inflation, although none can guarantee that. And in years with a serious market collapse, your monthly income could fall instead of rise.

If you're the type who doesn't want to deal with figuring out which fund to withdraw from each month or year and are comfortable with yearly income fluctuations, these funds could be worth looking into. But as with all investing, it doesn't make sense to use managed payout funds — or retirement income funds — as your only investment.