By Dana Anspach
Retirement income funds are actively managed to be able to pay regular retirement income. They provide a great, all in one investment management solution, and offer more flexibility (but less guarantees) than annuities.
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's stated objectives. None of the funds provide guarantees, and you should expect your investment income and balances to fluctuate.
Vanguard has three funds in its Managed Payout Fund series, each requiring a minimum investment of $25,000 and boasting low fees, with the expense ratios running from .45 - .48%.
Each fund intends to provide monthly income while maintaining or growing principal. You have the option to pick a fund that pays more income with less growth potential, or you can trade off less current income for more growth.
The targeted payout rates range from 3-7% depending on the fund you choose.
Bottom line: Funds may return principal to meet targeted payout amounts.
Fidelity has fourteen funds that are designed to provide monthly income by paying out principal and earnings over a set amount of time, functioning much like an annuity. Each fund has a minimum investment amount of $25,000 and reasonable expense ratios ranging from .54 - .66%.
Each fund gradually liquidates your investment, paying out your entire balance by the fund’s target date. The first fund has a target end date of 2016 and the last one in 2042, with the 2016 fund paying out the highest monthly amount, and the 2042 fund paying out the lowest monthly amount.
Bottom line: All principal will be returned to you and fund liquidated by target date.
Schwab has three funds in its Monthly Income Fund series, each requiring a minimum investment of only $100 (although $100 is not going to provide much monthly income). The funds have reasonable expense ratios ranging from .55 - .70%, and the funds contain a sales charge, which can be avoided if you invest a signficant amount.
The funds each have a targeted payout amount ranging from 2-8% depending on the fund, and the interest rate environment we are in. During lower interest rate environments these funds will opt for lowering the payout before dipping into principal.
Bottom line: Funds would choose lower payout over paying out principal in a low return environment.
John Hancock has three funds in its Retirement Income Fund series, each intended to pay out quarterly distributions. These funds have higher expenses than the other similar alternatives detailed above.
One of the funds has a minimum of only $500 - $1,000 while the other two funds have $50,000 minimums. These funds target a payout of .40 - .60 cents per share, which based on current share prices is about 4 – 6%.
Bottom line: John Hancock will attempt to manage these funds to minimize overall volatility, or fluctuation in value, while maintaining payout amounts.