A new breed of funds from Fidelity and Vanguard aim to alleviate one of retirees' biggest headaches: figuring out how to continue amassing a nest egg while generating a steady stream of monthly income.
Fidelity's Income Replacement funds, which launched in October, combine features of target-date retirement funds and annuities. Each of the 11 funds (horizon dates range from 2016 to 2036) contains a portfolio of Fidelity stock and bond funds that becomes more conservative over time. But instead of building toward a lump sum at maturity, as target-date funds do, the new funds gradually return investors' money via monthly payouts and are depleted by the horizon date. The distributions, which seek to keep pace with inflation, are expected to come from dividends, appreciation and a portion of the principal. Annual fees range from 0.54% to 0.65%.
Vanguard's Managed Payout funds, due out in early 2008, seek to generate monthly payouts without consuming principal. Instead of a set maturity date, the Real Growth, Moderate Growth and Capital Preservation funds aim to make cash distributions at an annual rate of 3%, 5% and 7%, respectively. Real Growth is suitable for investors who prefer a modest initial payout and more potential for appreciation; Capital Preservation sacrifices appreciation in exchange for higher payouts; and Moderate Growth strikes a balance between the two. Each will charge 0.34% a year.
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