Managed Payout Funds

As an alternative to income annuities, some mutual fund companies have rolled out managed payout funds. Historically, mutual funds have been geared toward investors who are amassing money for financial goals, notably retirement. Managed payout funds represent an attempt by fund companies to cater to investors who are no longer saving and instead are looking to generate regular income.

For instance, Fidelity Investments offers a series of income replacement funds. The funds, when coupled with Fidelity’s Smart Payment Program, aim to provide a stream of income that rises with inflation between now and the fund’s horizon date, at which point your investment would be depleted.

A more common approach is taken by Vanguard Group, which offers a managed payout fund that aims to throw off 4% a year, with the income paid monthly—but with no fixed horizon date. The hope is that the income will climb over time with inflation, but it could be cut if the fund performs poorly. To generate steady and rising income, the Vanguard fund owns a traditional mix of stocks and bonds, but also allocates money to commodities, foreign bonds and low-volatility stocks. In addition, it has part of its money in a so-called market neutral fund, which aims to generate moderate returns no matter what happens to stock prices.

Like Vanguard, Charles Schwab aims to provide monthly income in perpetuity. But Schwab’s lineup of monthly income funds comes in three flavors, each of which targets a different combination of income and growth. If you buy the fund that generates the most income, you should expect lower long-run growth.

Unsurprisingly, managed payout funds were roughed up during 2008’s stock market collapse, forcing them to cut the income paid to shareholders. Those cuts hurt the reputation of managed payout funds, many of which had only just been launched. Still, such funds are an intriguing option for retirees who want to keep their finances simple. These funds don’t provide guaranteed lifetime income, like Social Security or an income annuity. But they do offer a way to generate additional retirement income, while maintaining control over your assets and possibly allowing you to bequeath at least part of the money to your children or other family members.

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Previous: Immediate Variable Annuities

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