Income generating is the name of the game for retirees who could easily live out of the workforce for more than twenty years. But picking and choosing which stocks and fixed income products to invest in to generate yield can be tough for average investors to do. Enter retirement income funds. The idea behind these funds is to provide retirees a recurring stream of income that will last for part or all of their retirement years.  (See also: How To Create An Effective Retirement Income Strategy.)

Investors Have Choices With Retirement Income Funds

When it comes to retirement income funds, retirees have some choices. Some funds combine stocks, bonds and other securities to give investors income in an all-in-one approach to retirement investing. These types of funds are considered to be stable, which will be appealing to risk-averse retirees although the payout may not be super high. The investor still has to figure out how much they withdraw each month.

Then there are managed funds that provide retirees with monthly income but also offer the ability for their investments to grow. With a managed fund, the monthly distribution amount is set, typically for a year. The payout the retiree gets monthly is usually reevaluated on an annual basis. The payout retirees receive is based on the market. If the stock market takes a big dive, the monthly payout can be reduced. Income-replacement funds will give retirees money over a period of time plus any income earned. This type of fund liquidates at a designated date. These funds tend to generate high income but they can be risky. Investors interested in a target date retirement fund could purchase different funds with varying target dates to receive income for longer periods of time. (See also: 5 Ways To Fund Your Retirement.)

Worry-Free Ways to Get Access to Income

Retirement income funds make sense for investors who don’t want to worry about choosing their asset allocation, making sure their investments match their risk tolerance and that rebalancing is being done at the proper time. Not to mention that with many of such funds, investors don’t have to worry about figuring out the best withdrawal rate in retirement. That’s because a lot of retirement income funds are professionally managed and do all the work for them. Another plus: the funds are designed not only to give retirees a steady income stream, but they also keep up with the pace of inflation. That’s particularly important with people living longer. With the prospects of retirement lasting twenty to thirty years, retirees have to preserve and at the same time grow their savings. Otherwise they will face a situation where their money has diminished buying power. (See also: How Much Should Retirees Withdraw From Accounts?)

Be a Discerning Shopper When Choosing a Fund

For retirees mulling which funds to invest in, they should first look at the asset allocation of the different retirement income funds. Because a lot of investors are jittery about making their money last throughout retirement, a retirement income fund heavily skewed toward stocks may not sit well with them. Or it may be that the portfolio of investments is too conservative for the retiree’s particular risk tolerance. Investors should also look at the level of distributions the fund is aiming to achieve.

In addition to the investment makeup, retirees have to consider the fees associated with these funds. Not all funds are created equal, which means one fund can charge a lot more than another in fees and expenses. Because most retirement income funds are professionally managed, investors have to be mindful of how much they are paying for that hand holding. Some of the fees investors must compare include trading fees, managing the account and back office fees for administration and investor services. There can also be a commission if the money manager is paid that way. Those fees can eat away at a retiree's returns, and thus the amount of income they have to live off of, so investors need to compare the expenses carefully before choosing a fund. (See also: How to Lower Investment Account Fees In Retirement.)

Don’t Put All Your Eggs in One Basket

Retirement income funds have a place in a well-rounded financial plan, but they shouldn’t be the only investment retirees have. The best way to protect your assets and at the same time get some growth and income out of them is to have a diversified retirement investment plan that encompasses different areas of investing, giving retirees a broad base of exposure. After all, if your retirement savings was invested completely in one managed fund and the stock market has a really bad year, you can see a lot of your lifetime savings disappear.

The Bottom Line

Figuring out how much income retirees will need to draw down can be confusing. Likewise figuring out which investments are going to provide income but also limit the risk can be tough for retirees to do, which is where a retirement income fund can come in. But not every fund is going to be the same, which means retirees have to do some homework when choosing which ones to invest in. That means looking at the different type of funds, comparing the investment strategies and asset allocation and paying close attention to the fees associated with each retirement income fund they are considering.