"Generally, they will tell you how much they are going to have in equity and fixed income and money markets over a certain period of time," says Roseen. "If they have a large amount of equity and you're saying, 'Gosh, I just don't like to have that much of an aggressive portfolio,' you may want to choose one that has a higher portion of fixed income."
To compare funds that make payments for as long as possible, or in perpetuity, as Lipper defines them, investors should evaluate the asset allocation of the funds in addition to the level of distributions the fund is targeting. The annual distribution rate is generally a moving target and isn't guaranteed, but it can give you an idea of how much income the fund may provide.
Currently there are more retirement-focused mutual funds with a targeted end date than funds that pay out forever, says Roseen. Lipper counts nine unique perpetual retirement income funds and 22 unique nonperpetual retirement income funds. Many of these funds have other share classes with different fee structures as well.
The cost of owning the fund is another important point to compare.
When buying any mutual fund, investors should be aware of the load, or sales commission, to be paid upfront or over time, which will eat into principal.
Annual expenses will take a bite out of your principal every year as well, which will lower the payout slightly. Because many retirement income funds are "funds of funds" -- meaning they are composed of several mutual funds -- the total expense ratio will reflect the costs of the marketed retirement income fund and those within the basket.
"The average net prospectus expense ratio for retirement income funds is 0.94 percent -- that includes direct and indirect expenses for funds of funds," says Roseen.
Retirement income fund investing strategies
The best way to use nonperpetuity funds may be by laddering several funds that expire over varying time frames.
"Pick several dates, let's say 2020, 2025 and 2030. I wouldn't put it all in one year because the way they weight the asset mix is based on those targeted dates," says Dan Yu, managing director of EisnerAmper Wealth Advisors in New York City.
The way the fund's allocation will change over time can impact your financial picture, particularly if you live a long time.
Depending on the fund and the strategy it uses, motivated investors may be able to replicate the approach on their own. For instance, the PIMCO Real Income Fund ladders Treasury inflation-protected xecurities, a very accessible strategy for most people.
"A lot of people find what we do boring or complex or uninteresting, but they know they need some management of it and these funds might be the way to do it," says Yu. "But most people with a basket of index funds or ETFs could do the same thing. They very quickly and easily could do it."
Bankrate's story, "Generating income from $500,000," showcases how Yu and two other financial advisers might design a portfolio worth a half-million dollars for a 70-year-old client.
For people who don't want to do it themselves and don't have a relationship with an adviser, retirement income funds could be a happy-medium way of getting professional investment management and regular income payouts. Though they seem like they could be an integral part of the retirement income solution, only time will tell if these funds will live up to their promise.
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