This Fund Helps Keep Retirees from Running Out of Money
Many retirees discover that saving for their golden years was the easy part. The challenge is making sure their spending rate avoids depleting their nest egg. A growing movement in the mutual fund world is working on solutions for that conundrum. While just a handful of so-called retirement income funds are currently available, financial advisors say the lineup of offerings is worth exploring.
"They can be a good solution for do-it-yourself or [nonprofessional] investors," said Dana Anspach, a certified financial planner and CEO of Sensible Money. "If you don't know how to allocate your mix of investments or don't have a distribution plan, these funds can put that on autopilot for you," she said.
Basically, retirement income funds — also called managed payout funds — are actively managed portfolios of mutual funds. While their investment strategies differ, their goal is the same: to help you avoid spending down your assets too quickly. With expense ratios ranging from about 0.34 percent to more than 1 percent, these portfolios also automatically distribute income to shareholders at rates intended to assure sustainability over time. For instance, Vanguard's Managed Payout Fund aims to give investors a yearly withdrawal rate of 4 percent. They also are essentially offshoots of target-date funds, whose assets automatically shift to more conservative investments as you approach retirement. With $996 billion in assets, these set-it-and-forget-it funds have ballooned in popularity over the last decade.
In contrast, the handful of retirement income funds on the market has remained in the shadows of their brethren. "The first wave of these came right around the market crisis [of 2008-2009] so they didn't gain a lot of traction," said Jeff Holt, associate director of manager research at Morningstar. "In the last two or three years there's been some renewed interest in retirement income." Most recently, T. Rowe Price started the Retirement Income 2020 Fund. As its name suggests, it is aimed at investors nearing the end of their working days. "There's a need out there for retirees to [manage] their income and it's a challenge we're addressing," said Sebastien Page, head of T. Rowe's asset allocation group.
While interest in the company's new fund won't be available until its next quarterly report is filed with regulators, its competitors' assets are nothing to boast about. Collectively, the funds claim only a few billion of the $15.7 trillion invested in mutual funds. "I think fund managers are testing the water to see what will resonate with investors," Holt said. The problem of managing retirement income has become more acute as baby boomers retire at an estimated rate of 10,000 per day. The Insured Retirement Institute's latest report on the 74.9 million-strong generation shows that the number of Americans over the age of 65 has risen more than 18 percent since 2011.
"Retirement income is a bigger deal than any other part of financial planning because at some point you no longer have the ability to earn more money," said Kathryn Hauer, a CFP with Wilson David Investment Advisors. "You have to manage what you have very carefully." Some retirees in search of guaranteed income end up purchasing annuities. These complex contracts tend to be more expensive than other investments and typically cannot be liquidated within preset times — lasting years, typically — without paying hefty surrender charges. Nevertheless, the income guarantee makes them worth the price for some investors.
Although retirement income funds come with no guarantees like annuities do, they could serve as an alternative for other reasons. "People often will buy an annuity to minimize volatility in their investments, but it's an expensive way to do it," Hauer said. "So these funds could be an alternative." Retirement income funds have varying minimum investments. For example, T. Rowe's fund requires at least $25,000, as does Fidelity Investments' Income Replacement Funds. Charles Schwab's Monthly Income Funds have a $100 minimum.
While they are designed to be an all-in-one option, they also could be part of a larger strategy. "Some investors might see our fund as a complete solution, in combination with Social Security," T. Rowe's Page said. "For others, it could be a way to add income to their overall portfolio. It can work well as a building block." Holt cautioned that before putting all of your retirement savings in one of these funds, make sure you trust the investment management team. "You'd need to have a lot of confidence in the investment strategy to put all of your money in it," Holt said.
