Now it’s easier to put your retirement income on autopilot.
Taking a cue from the popular target-date retirement funds, some major investment firms have begun to roll out life-cycle mutual funds for post-retirement investors. Paired with managed withdrawal plans that are designed to keep retirees from outliving their nest eggs, the funds invest in a broad mix of asset classes and become more conservative over time.
A good idea? That hinges on how much risk you can take as an investor and how much flexibility you need as a spender. Some critics say they have substantial limitations.
Chasing the Boomers
Fidelity Investments this month rolled out a suite of income products, including a deferred variable annuity and 11 mutual funds that offer an optional payout stream.
And Vanguard Group Inc. has filed with regulators for a competing lineup. A launch is expected shortly.
Industry observers say the rest of the fund industry isn’t far behind as it scrambles to hang on to Boomers’ savings.
Its aim: mirror the ease and appeal of target-date funds, whose assets have soared in recent years, with a payout strategy that frees retirees from buying and selling to generate income.
It’s not just the fund industry participating. Merrill Lynch & Co. launched managed-withdrawal strategies last year.
Barclays Global Investors, meanwhile, launched SponsorMatch, an investment strategy for workplace retirement plans that blends annuities and market investments to provide more pensionlike results for the defined-contribution market.
“Everybody’s getting into this” as the first wave of Baby Boomers nears retirement, said Philip Lubinski, a financial planner with First Financial Strategies LLC in Denver and a developer of income models used by advisers.
The Fidelity Income Replacement Funds are life-cycle funds, with end dates ranging from 2016 to 2036. Retirees might purchase a near-term fund to bridge a gap between early retirement and collecting Social Security, for example, or a fund with a 30-year investment time frame to last to an older age.
The funds start with a higher allocation of stocks for growth potential, becoming more conservative during the years the money stays invested. The optional payout plan of each fund is designed to return all of the principal and its income back to the investor, though this is not guaranteed.
Every fund comes with an optional payout program to liquidate the account. Fidelity resets the withdrawal rate each year based on market conditions, attempting to allow the highest possible income without jeopardizing its ability to continue payouts throughout the time period.
Vanguard will offer funds that pay out varying income, depending on an investor’s need for inflation protection and capital appreciation, said Ellen Rinaldi, a Vanguard principal.
The Vanguard distribution strategy is intended to preserve principal at the end of the target period, which might be important for someone trying to live off of portfolio income and leave at least a portion of principal to heirs.
Despite the push, it isn’t hard to find doubters. The plans aren’t flexible enough to handle the divergent needs of retirees, and investors might mistake them for the pensions of their parents’ era, critics warn.
“None of these products [other than the annuity] provides a guarantee,” said Francois Gadenne, president of Retirement Engineering Inc., a Boston firm that holds patents on competing strategies that are being sold to financial advisers for future introduction to consumers. Those products, Gadenne said, will make it easier for consumers wary of complex annuity features to buy guaranteed retirement income at a transparent price.
Income not guaranteed
Stephen Horan, head of private wealth for the CFA Institute in Charlottesville, Va., also worries that the income-replacement funds might give the impression of a guarantee. And he thinks investors will be uncomfortable with payouts that fluctuate yearly.
“Planners won’t be inclined to recommend a product with that much variability,” he said.
By contrast, advisers often recommend investors start with a conservative baseline withdrawal in the first year of retirement, then adjust that figure each year for inflation.
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That strategy is riskier because it doesn’t respond to prolonged bear markets, said Fidelity officials, who are launching the funds directly to consumers and through its adviser network.
Investing regular amounts over time without trying to time the stock market works well as investors accumulate assets, but that can be devastating in the reverse if retirees keep boosting withdrawals during market downturns, said Dan Beckman, a vice president with Fidelity’s Institutional Services unit.
Financial planner Lubinski agrees but said retirees are better off segmenting their savings into pots — a shorter-term pile with guaranteed regular income payments and a long-term pile invested for growth — than signing on to a prescribed withdrawal plan without guarantees.
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