Retirement income products
Retirement income products
A new breed of retirement income funds

Retirement income products » A new breed of retirement income funds

To some people, thinking about investments is the height of tedium. To others, the topic is too intimidating or complex to master. It's particularly daunting for those close to retirement who have no pension to look forward to, and who need to convert their assets into a stream of income.

Among the financial institutions scrambling to provide solutions are mutual fund firms. Some are offering individual investors a new breed of target-date funds that focus on providing retirement income.

Mutual funds managing paychecks

Most of these newfangled retirement income funds have sprung up only within the last three years, and there's a great deal of variability within the category. Because there's no standard nomenclature for them, discussing mutual funds designed to pay out retirement income over time can be more than a little confusing.

One type of retirement income fund is actually a static asset allocation fund. They are typically the end of the road in a target-date series.

Because they don't offer a payout, those types of funds are excluded from the retirement income fund category put together by Lipper, an investment research company.

The funds that Lipper considers to be within the rubric of retirement income funds include those with appropriate asset allocations for retired investors that also pay out money over time.

"We designed this classification to identify funds with professionally managed drawdowns -- that is, funds that provide an allowance of sorts to the investor," says Tom Roseen, senior analyst and research manager for the U.S. and Latin America at Lipper. "So the investor is not only depending on the manager to asset allocate and diversify, but also provide drawdown expertise to the investor."

The category now has $1.1 billion of net assets under management and growing.

Two types of retirement income funds

According to Roseen, the 30-odd funds in this category can be divided into two subsets: perpetuity and nonperpetuity. The majority are nonperpetuity funds that offer regular payments over a specific time.

Nonperpetuity funds will have an end date at which point all of the money will be paid out, earning them the unofficial moniker "target-death funds."

"You could look at it as an annuity replacement-type vehicle," says Certified Financial Planner Nick Withrow, managing advisor with BKD Wealth Advisors in Kansas City, Mo. "Its goal is to provide a stream of income over a known number of years."

On the other hand, perpetuity funds are designed to last as long as possible. Withrow likens their strategy to that of a university endowment. Rather than exhausting the principal, these funds will try to maintain or even grow your nest egg over time while distributing income. Because they try to preserve investors' principal, funds that pay out in perpetuity offer smaller payout percentages than their nonperpetuity counterparts.

According to Roseen, the three-year average annual return through May 2011 for the category of retirement income funds was 3.15 percent. See the complete list of retirement income funds, courtesy of Lipper.

Assessing retirement income funds

Funds that make regular payments could be part of a retirement solution for many investors, but there are some key considerations.

When assessing funds, investors need to be sure they're not comparing apples and oranges. The first hurdle is choosing between funds with a targeted end date and those that pay out forever.

To compare the nonperpetuity target-date funds, group similar target years together. Like target-date funds intended for the accumulation phase of retirement planning, the investments within these funds will become more conservative as their end date nears.

To compare similarly dated funds, "look at their glide path," says Roseen. A glide path is the progressive change in asset allocation over time.


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