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Are retirement income funds the answer?

By Barbara Whelehan ·
Friday, February 4, 2011
Posted: 3 pm ET

If you think saving for retirement is difficult, just wait. Extracting a paycheck from your savings during retirement promises to be killer.

What should you put your money in? A mix of stocks, bonds and cash? Conservative asset allocation funds? Annuities? Laddered CDs? In what order should you sell off your assets to produce an adequate income? How do taxes figure into the equation?

The fund companies want to make it easy for you, and of course, they want your assets.

Earlier this week Fidelity announced it's taking retirement income planning to a new level on behalf of boomers, kicking off a 30-day "investor engagement initiative" at 200 free, live seminars from coast to coast and on the Web. As part of the program, customers and noncustomers can sign up for guidance on a one-to-one basis with an investment professional -- at no cost.

Of course, in order to take full advantage of Fidelity's help, you'll be encouraged to move your assets over to the firm.

Accumulation vs. distribution

The "distribution phase" of the retirement planning business has been a hot topic among financial firms, as they scramble to design all types of products to accommodate retirees. But the focus is not exactly new, since fund companies have been coming up with such things as target-date funds, replacement income funds, monthly payout funds and the like over recent years. Below is a list of "retirement income" funds, which includes these various types of funds. This is a partial list, representing funds with the most assets.

Retirement income funds
Name Total return 1 yr % Total return*  5 yr % Total return* 10 yr % Cash % Equity % Bond %
Benchmark: S&P 500 TR 22.19 2.24 1.30 0.00 100.00 0.00
Average for retirement income category 9.94 3.70 3.18 14.33 25.08 58.50
Vanguard Target Retirement Income Inv 10.08 5.03   7.14 29.95 62.70
Fidelity Freedom Income 8.69 4.08 3.75 26.75 20.47 52.29
T. Rowe Price Retirement Income 12.38 4.90   9.28 41.78 48.59
Wells Fargo Advantage DJ Target Today A 7.29 4.38 3.93 8.52 14.34 76.19
BlackRock LifePath Retirement Instl 10.91 4.32 4.49 8.48 37.64 53.55
State Farm LifePath Inc Retire Legacy A 10.48 3.87   8.39 36.36 54.99
Principal LifeTime Strategic Inc Instl 12.14 2.45   -0.81 23.94 76.09
Fidelity Freedom K Income 8.73     26.80 20.50 52.23
Vanguard Managed Payout Dis Focus Inv 17.54     9.45 65.22 25.01
Vanguard Managed Payout Gr & Dis Inv 18.63     9.47 75.28 14.88
JPMorgan SmartRetirement Income A 12.72     12.74 32.53 53.70
American Century LIVESTRONG Inc A 12.14 4.16   12.85 44.82 42.26
Fidelity Advisor Freedom Inc A 8.71 4.13   26.58 19.95 52.76
ING Solution Inc I 11.92 4.15   6.49 27.61 64.62
Vantagepoint Milestone Retirement Income 7.98 4.09   15.12 25.02 56.94
USAA Target Retirement Income 12.04     5.15 29.00 62.25
ING Index Solution Income I 9.08     10.22 31.01 58.65
American Beacon Retire Inc & Apprec Inv 7.51 5.66   4.06 4.66 76.71
MassMutual Select Dest Retire Inc A 11.30 3.87   12.32 31.47 55.80
DWS LifeCompass Retirement S 10.91 2.35 2.81 2.65 37.37 59.56
MFS Lifetime Retirement Income A 10.63 6.00   7.18 27.25 65.34
TIAA-CREF Lifecycle Retire Inc Instl 12.60     10.01 39.24 49.75
Schwab Monthly Income Enh Payout 8.80     9.18 24.89 65.76
Schwab Monthly Income Max Payout 6.08     11.67 10.04 78.15
Vanguard Managed Payout Gr Focus Inv 20.50     9.49 84.71 5.38
Source: Morningstar.
*Returns are annualized, through Jan. 31, 2011.

As you can see, only a handful of these funds have been around for 10 years or longer, and the returns over that time frame reflect a difficult period in the stock market. While most haven't even managed 4 percent annualized returns, notice that they far surpass the S&P 500's paltry 1.3 percent average gain. So the bond and cash positions of these retirement income funds helped buoy them through the torrential storms. Conversely, over the past year, all these funds lagged the S&P 500 because of their protective bond and cash positions.

Still, if fund investors had followed the 4 percent-per-year withdrawal rule over the past 10 years, they would have less principal today than they had a decade ago.

I asked Morningstar fund analyst Greg Carlson if these funds live up to retirement investors' expectations.

"It's a tough question because if you look at the equity weightings, you'll notice they're quite different from each other," he says.

Is this a smart place for average investors to put their money so they can withdraw 4 percent each year?

"I'm afraid to say yes, because there are so many funds and so many levels of expertise," he says.

You mean among investors?

"Among the funds," he replies. "Some are not going to be so great."

Which makes the retirement-income fund purchase a decision that requires some work.

How would you direct investors? I ask Carlson.

"Pretty simple," says Carlson. "First look at allocations and the goals. Is this a retirement income fund, a managed payout fund? If it's that, how is it operated?"

Just so you understand, a retirement income fund's objective is to maintain a steady allocation over time. The managed payout fund often uses an endowment-style approach, growing principal while funding a payout. Some managed payout funds are designed to last a particular length of time, period.

"I don't think there are any standouts in the managed payout area yet," says Carlson. "But you know these funds are young, so it's going to take awhile to see if they can prove themselves to meet their goals."

For those who don't have much time to monitor them before retirement, it may take a leap of faith. But if you do decide to buy such a fund, make sure it's cheap, its objective matches your own and that you "look under the hood," as Carlson often says.

Follow me on Twitter: BWhelehan

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