A new way to invest after you retire
Fund companies entice baby boomers with new 'payout funds' that promise to stretch retirees' money over set time periods.
from the December 31, 2007 edition
Page 3 of 3
Overall, it's too soon to make "hard conclusions" about the funds, Mr. Gunter says in a telephone interview. "We need to see how well they work in practice."
Of course, payout funds wouldn't have to be a lone way of getting income in retirement. And some fund mangers bill them as just one part of an overall income-producing plan.
Indeed, when Fidelity unveiled its Income Replacement Funds, it also launched a deferred variable annuity, called the Fidelity Growth and Guaranteed Income. These two products extend Fidelity's overall choices of payout arrangements, the company suggests. "The Fidelity Growth and Income annuity is a guaranteed product with a floor on its payment level," explains Christopher Sharpe, a Fidelity portfolio manager. "And to complement that, we wanted a mutual fund [series that also] provides an income stream."
And for Vanguard's payout funds, they "are just one of our options to help investors with their withdrawals," says spokesman John Woerth. Among other products and services, he says the company offers the Vanguard Lifetime Income Program, which is an immediate annuity.
"The managed payout funds for retirement offer an opportunity for investors to diversify their income streams – and to provide a complement to annuities, a pension, and Social Security payments," says Mr. Woerth. "If you already have income from a pension and Social Security, you might have the luxury of taking greater risk in products like these [payout] funds."
A simple way for retirees to calculate payouts
New mutual funds for retirees – that provide regular payouts – may be one way of getting an income stream after you stop working. But financial planner Bill Bengen, of El Cajon, Calif., says you don't have to go that route. Indeed, he believes many fund companies allow you to take steady automatic distributions from your existing fund accounts if you ask for them.
The wrinkle: You'd have to know how much payout to ask for.
And that's where Mr. Bengen's research comes in: Bengen, author of the book, "Conserving Client Portfolios During Retirement," published last year by the Financial Planning Association Press, has studied this issue since 1993. And based on his calculations, he believes 4.5 percent of total tax-deferred assets – stocks, bonds, and the like – is the correct payout amount in the first year of payouts. In following years, that payout rate would rise in line with inflation.
Bengen bases his withdrawal rate, back-tested over 80 years, on the effects of different withdrawal rates in different market conditions. He found that a 4.5 percent payout rate, annually adjusted for inflation, was the highest rate he could recommend to ensure that people's assets last for 30 years after retirement and sustain their lifestyle.
But is that typically enough for retirees to live on? "Clients may not like that percentage, but the numbers tell the story: You either live within your means or you'll be headed for trouble," he says. "This [4.5 percent] payout rate is designed to cover all your expenses, including income taxes, regardless of the size of your portfolio. Any higher rate could be hazardous to the health of that portfolio."
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