A new breed of funds from Fidelity and Vanguard aim to alleviate one of retirees' biggest headaches: how to continue growing 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 funds and annuities. Each of the 11 funds, with horizon dates every two years 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 large payout at maturity, as target-dates do, the income-replacement funds gradually return the money via monthly payouts.
The distributions, which seek to keep pace with inflation, are expected to come from dividends, fund appreciation and a portion of principal. Meanwhile, the remaining assets stay invested.
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Fidelity says that if the strategy works as intended, $100,000 invested in a 30-year fund should yield distributions of about $350,000 over that period.
Vanguard's Managed Payout funds, which are currently in registration with the Securities and Exchange Commission, are also designed to generate monthly cash payouts without consuming principal.
The Real Growth, Moderate Growth, and Capital Preservation funds -- which each invests in a collection of other Vanguard funds -- aim to distribute annual payouts of 3%, 5% and 7%, respectively. Unlike target-date funds, Vanguard's offerings don't shift to a more conservative allocation over time or have set maturity dates.
The Real Growth fund is suited for investors who prefer a modest initial payout and more potential for appreciation; the Capital Preservation fund is aimed at investors willing to sacrifice some appreciation in exchange for higher monthly payouts; and Moderate Growth strikes a balance between the other two funds. Monthly payouts are adjusted each year based on the fund's performance over the three previous years (Fidelity's payouts are based on the annual account balance.)
Another difference: Vanguard's funds will invest mostly in stock and bond index funds. But they may also invest in a fund that tracks an index of real estate investment trusts, commodity-linked investments and market-neutral strategies. (The firm recently announced plans to launch a market-neutral fund, which aims to generate returns that aren't correlated with the market.)
Fidelity's funds draw from a group of 15 stock and bond funds, including Equity Income (symbol FEQIX), Small Cap Opportunities (FSOPX), the adviser share class of International Discovery (FIGRX), and Strategic Income (FSICX). The funds, which require a minimum initial investment of $25,000, levy annual fees ranging from 0.54% to 0.65%, depending on the horizon date.
Vanguard's funds, which should launch in early 2008, will each charge 0.34%. No minimum investment has been set.
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