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Two types can generate regular, growing stream of income for retirees
Published on Sunday, Oct 28, 2007
Two new types of mutual funds can greatly simplify the way we manage our money in retirement.
Fidelity and Vanguard, the nation's two biggest fund companies, have come up with funds designed to pay monthly income with the potential to keep up with inflation or outpace it. These no-load funds can relieve retirees of the complex, and sometimes scary, task of figuring out how much money they can safely spend each year.
Fidelity's ''Income Replacement'' funds provide monthly income that includes return of all principal over a set period (currently, there are 11 funds with ending dates in two-year intervals from Dec. 31, 2016, to Dec. 31, 2036). They can be appropriate for investors needing income for a specific period or retirees who want maximum income throughout their expected lifetimes.
Three proposed Vanguard ''Managed Payout'' funds, expected to launch early next year, are designed to pay monthly income while at least preserving principal. They can be appropriate for retirees who need regular income but want their full principal available for unexpected expenses or to pass on.
In each case, the prospectus makes it clear there are no guarantees and investors can lose money. But by managing the asset allocation and withdrawal rate, the funds seek to generate a regular and potentially growing income stream.
''We are comfortable, given our asset-allocation models and market statistics, that these things will deliver,'' said Boyce Greer, Fidelity's president of fixed-income and asset allocation. John Ameriks, principal with Vanguard Investment Counseling and Research, said the firm's analysis ''suggests our design is consistent with what the markets can deliver.''
Offering professional management at low cost, these funds merit consideration as part of a retirement income plan (I will consider both for myself). Annual expenses range from 0.34 percent for Vanguard to 0.65 percent for the longest-dated Fidelity 2036 fund. But both firms risk red faces and unhappy customers if the funds don't meet their explicit income and/or return targets.
Vanguard seeks a long-term return of more than 5 percent a year above inflation for Managed Payout Real Growth Fund, the most aggressive; 5 percent a year above inflation for Managed Payout Moderate Growth, and 7 percent a year (regardless of inflation) for Managed Payout Capital Preservation.
Real Growth pays out the least the first year, 3 percent of the amount invested, compared to 5 percent for Moderate Growth and 7 percent for Capital Preservation. But over time, Real Growth is expected to provide the highest return and payments, the prospectus states.
Fidelity's target payout rate increases each year. Examples: In the 30th year before a fund's end date, investors would receive 5.09 percent of the account balance; 20 years before, 6.51 percent; 10 years before, 11.15 percent. Based on market history, Fidelity's promotional literature suggests an investor who puts in $100,000 can potentially receive more than $216,000 over 20 years.
The Income Replacement funds invest in other Fidelity equity, fixed-income and short-term funds in a mix that gradually becomes more conservative as the liquidation date nears. Vanguard's funds, besides the basic stock-bond-cash asset allocation through Vanguard index funds, will include real estate investment trusts, inflation-protected securities, commodity-linked investments and ''market neutral'' investments.
Send questions or comments to Humberto Cruz at AskHumberto@aol.com or by mail to Tribune Media Services, 2225 Kenmore Ave., Buffalo, N.Y. 14207. Personal replies are not possible.
Two new types of mutual funds can greatly simplify the way we manage our money in retirement.
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