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Providing hordes of retiring Baby Boomers with reliable income streams without the high costs and restrictions that accompany guaranteed investments, such as annuitites, has been a challenge.
Companies that rolled out managed-payout funds over the past year or so, notably Vanguard and Fidelity Investments, stressed that the income payouts on their funds wouldn't be guaranteed--but they believed the initial payments would be sustainable.
Recently, Vanguard slashed the distribution of its three managed-payout funds by more than 15%. And because the funds have lost money since their launch last May, 100% of the income paid to investors is actually a return of their original investment rather than earnings, says John Ameriks, who oversees the portfolios. Vanguard's funds are designed to pay out between 3% and 7% of a person's average account value over rolling three-year periods. And Mr. Ameriks says that goal is still attainable.
At Fidelity, investors will also feel the bite. Fidelity's funds are designed to pay an increasing percentage of an investor's account value every year for a fixed period of time. But because the fund was down almost 18% last year, the dollars paid to someone who invested at year-end 2007 will be about 21% lower in 2009 than in 2008, Fidelity says. Fidelity portfolio manager Jonathan Shelon says investors should use the funds in concert with other income sources which are more predictable, such as Social Security and any pensions.
Source: The Wall Street Journal, February 2, 2009
