Bookmark this page
Learning to live off your investments in retirement is harder than saving the money to begin with. Particularly in this unpredictable investment environment, cutting yourself a regular retirement check from your investments can be scary.
Purchasing an annuity is a retirement planning possibility that many retirees are reluctant to embrace because there's no inflation protection and no flexibility. Plus, if you die young, even with joint and survivor options, the company that sold you the annuity keeps most of the money.
In the last couple of years, Fidelity Investments, Vanguard Group and a few other investment management companies have rolled out an alternative to annuities called a managed payout fund. Last weekend, the Wall Street Journal examined how well some of these funds have done since their inception and the news was pretty discouraging.
To be fair, most of these funds were rolled out in the worst possible financial environment. So the fact that many of them haven't gained much and in some cases, were paying out the regular checks they promised from principal not interest isn't surprising. Still, the report made it clear that living on investment income, especially when you don't have a huge pot of money, can be rough.
If you are still a distance from retirement, here's a little exercise you might consider. It doesn't require spending any money and it might tell you something important about your ability to live on your savings.
Take a look at Vanguard or the Fidelity Investment prospectus, available on their websites, for the managed-payout fund of your choice. See how they are invested, then set yourself up a personal portfolio on Google Finance or one of the other websites that let you do it for free and theoretically, allocate your savings in the same way the fund does.
Once every quarter, subtract the amount of "money" that you would be taking out if this were a real retirement strategy. See how well you do. If you feel good about how the fund is managing your money, you might consider letting them have it once you reach retirement. Or maybe this exercise will convince you that you can manage your money yourself -- and save the management fees.
If you don't like the result, you haven't lost any real money and you can cross that strategy off the retirement planning list.
