Investor can leave decisions to funds


October 14, 2007|By EILEEN AMBROSE

You thought saving and investing for retirement was tough? Spending properly once you retire might be tougher. Your nest egg needs to last the rest of your life, and there's little room for error.

You might not have given much thought to this. But investment companies have.

This month, Fidelity Investments launched a series of funds designed to manage distributions for retirees, and the Vanguard Group plans to offer similar funds early next year.

Other investment companies are introducing annuities as an investment option within a 401(k) so that today's savers can buy an income stream for tomorrow.

More products are likely to be introduced as the number of retirees swells.

"This is just the first shot," says Jeff Tjornehoj, senior research analyst with Lipper Inc. in Colorado.

And it's none too soon. The first wave of baby boomers is about to turn 62, the age at which people can start receiving Social Security benefits.

Workers are expected to roll over more than $1 trillion from 401(k)s and similar plans over the next five years, according to the Financial Research Corp.

Many boomers won't have a traditional pension like the ones the previous generation had, and they are likely to live longer. That makes it imperative that they manage their money wisely.

The new mutual funds from Fidelity and Vanguard are geared to retirees who want to maintain control over their assets but don't want to have to decide how to invest and how much to withdraw annually.

Reverse approach

Fidelity's Income Replacement Funds are similar to the popular target-date retirement funds - only in reverse. With a target date fund, you choose a fund with the date closest to your year of retirement, and the fund does all the investing for you.

The Income Replacement Funds handle the investment decisions and also distribute earnings and principal regularly. You choose the number of years for which you want a monthly income before the account is depleted. Fidelity offers 11 such funds, each with a different date, ranging from 2016 to 2036. At the end of the target year, the account will be empty.

Your monthly payments remain the same during the year but are readjusted annually. The goal is for payments to keep up with inflation, but no promises are made. Each fund is invested in other Fidelity funds, so your money is subject to the ups and downs of the market.

Web calculator

Fidelity's Web site,, has a calculator to figure the right fund for you based on how much you have to invest or the desired monthly payment. The minimum investment is $25,000.

Say you want to start out with a monthly income of $1,000 for 20 or so years. Based on the calculator, you would need to invest about $197,000 in the 2028 fund.

Like other mutual funds, these are flexible. You can sell them when you want without penalty or add money. If you come into a windfall, you can suspend payments and later resume them, says Boyce I. Greer, president of fixed income and asset allocation at Fidelity. And the income is taxed just like distributions from other mutual funds.

The annual fee ranges from 0.54 percent to 0.65 percent of invested assets, cheaper than an annuity.

Vanguard's Managed Payout Funds will be introduced early next year. Unlike Fidelity's funds, Vanguard's funds will aim to preserve capital on top of making distributions. This way, you will still have money that can be used later for health care or to leave to heirs, says Ellen Rinaldi, a principal at Vanguard.

The three Vanguard funds will give investors an option of a 3 percent, 5 percent or 7 percent annual payout. Investors' monthly payments will remain the same for the year, and each year will be recalculated based on the number of shares and fund performance. The estimated annual cost will be 0.34 percent.

The funds will invest in Vanguard funds and other investments. Performance isn't guaranteed. There are "no promises that we don't dip into capital in any one of the three at a given time," Rinaldi says.

Some investment companies offer annuities that employers can add as an investment option in a 401(k), like a mutual fund.

Buying an annuity through payroll deductions might be more palatable for workers than turning over a big chunk of assets at retirement to buy an annuity, says Jody Strakosch, national director at MetLife. The insurer offers an annuity for 401(k)s called Personal Pension Builder.

$100 a month

According to MetLife, a 25-year-old contributing $100 a month to the annuity - and increasing that by 3 percent a year - would receive monthly payments of about $1,461 for life starting at 65. A 50-year-old making the same contributions would receive about $190 per month.

Fees are lower for annuities purchased through a 401(k) than if workers buy one on their own. MetLife charges a fee of 0.70 percent to 1 percent of invested assets each year. If you take a hardship or in-service withdrawal, you will be charged a 1 percent penalty.

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