Four fund companies have come out with their version of a retirement income fund: Vanguard, Schwab, Fidelity and John Hancock. Additional details on each are below. Each fund manages a portfolio of other funds, changing the allocation to meet the funds’ stated objectives. None of the funds provide guarantees, which means, you should expect your investment income and asset prices to fluctuate in value. If you are familiar with the 4% rule, which says that on average retirees should be able to withdraw 4% of their invested assets each year in retirement and reasonably expect to have their money last 30 years, then you’ll understand why the payout rate is likely set at 4%. The fund invests by using a “fund of funds” concept, where your money is allocated across numerous other Vanguard stock and bond funds and the allocation is changed as the fund manager deems appropriate. If necessary, the fund may dip into principal to meet its targeted payout amount. This strategy is best used when you are willing to give the fund a long period of time to accomplish its objective. If you withdraw excess money when the fund goes through a period of poor returns, you will be unlikely to experience the long-term results the fund is designed to provide for you. Income and principal are not guaranteed. The fund has a targeted payout rate, but a payout is not the same thing as a yield, as part of the money being paid out may be a return of principal.
Basics of the Vanguard Managed payout fund
Minimum investment: $25,000 Expense ratio: .38% No front-end sales charge or surrender charges Targeted payout rate: 4% a year, paid out on a monthly basis, which means about $315 - $330 per month, per $100,000 invested Vanguard’s website provides a calculator to show you your expected income depending on the amount you invest.
The funds accomplish their goal by gradually liquidating your investment, paying out your entire balance by the time you reach the fund’s target date. Depending on how long you want your money to last you can select a fund that will have paid out 100% of your balance by a specific year such as 2020, 2030, or 2042. The longer the period of time you select, the less you’ll receive each month. The investment mix of each fund will automatically change over time, becoming more conservative as you near the fund’s ending date. Income and principal are not guaranteed.
Basics of the Income Replacement FundsSM
Minimum investment: $25,000Expense ratios: .50% - .70%No front-end sales charge or surrender charges
Payout rates will vary, with the 2020 fund paying out perhaps as much as 16% a year, while the 2041 fund may payout 4% a year. Check Fidelity’s website for details on the funds and their current distribution schedules. The funds each have a targeted payout amount ranging from 1-8% depending on the fund, and the current interest rate environment. The funds are named “Moderate Payout”, “Enhanced Payout”, and “Maximum Payout”. The Moderate Payout fund can have up to 60% of the fund in equities, while the Maximum Payout fund may have up to 25% in equities. During lower interest rate environments these funds will opt for lowering the payout before dipping into principal. This means monthly income can and will vary.
Basics of the Monthly Income Funds
Minimum investment: $100Expense ratios: .47% - .66%No front-end sales charge or surrender chargesPayouts, in today’s low interest rate environment, 3% or less for the Moderate Payout fund, 4% or less for the Enhanced Payout Fund, and 5% or less for the Maximum Payout fund.
The funds accomplish this by using a “fund of funds” concept, where your money is allocated across numerous other stock and bond funds, and the allocation is changed as the fund manager deems appropriate. Distribution amounts and principal are not guaranteed. The strategy used by these funds has the highest probability of success over long periods of time. If you pull your money out when the fund goes through a period of time with negative returns (which will happen to almost all funds at some point), you will be unlikely to experience the results the fund is intended to accomplish for you.
Basics of the Retirement Living Funds
John Hancock’s retirement living funds have expenses in excess of 1% a year, which is higher than other similar alternatives. Each of the funds in their Retirement Living Series has a different target date ranging from 2010 to 2060. Most of the funds have a minimum initial investment of $1,000 for Class A, B, and C shares. There may be no minimum for certain share classes that are offered through a group retirement plan. You can find additional information about the funds by looking on John Hancock’s website under the asset allocation category of funds.
