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  • LaDell Emmons

    LaDell Emmons
July 19, 2011

Your money: Create retirement paycheck with managed payout funds

By LaDell Emmons OSU Extension Educator

McALESTER — The following is an article that is written by my colleague, Dr. Eileen St. Pierre, personal finance specialist at Oklahoma State University. I felt it is important to share with the present economy being questioned.

We have all been told to save as much as we can for retirement. What we’re not told is how we are supposed to withdraw that money while we are in retirement. That’s the dilemma that many baby boomers are starting to face or soon will be.

We are all used to getting a regular paycheck. Social Security can provide a regular source of retirement income, but it was never meant to be a retiree’s sole source of income. As more companies are switching from pensions to 401(k) plans, the burden of determining how these funds are invested and then withdrawn in retirement is increasingly being shifted from employer to employee.

Investment companies have been trying to come up with innovative products to help retirees create an income stream. Annuities can provide that, but they have high surrender charges and other fees and require the investor to give up control of their money. An alternative to an annuity is a managed payout fund. While managed payout funds do not guarantee their income stream like annuities do, they offer investors the liquidity, transparency, and lower fees of a mutual fund.

Make sure you understand the fund’s distribution policy. There are two different types. The first policy is the payout policy. A payout policy is designed to pay distributions in perpetuity (forever) from investment earnings. If the investment performance is poor, the fund may return some of the initial investment (capital). To avoid doing this, these funds may reset their payment rates annually. Therefore, your income payment may vary over time. You don’t have to hold the fund forever — you can sell it just like the investment company’s other funds. Examples include Vanguard’s Managed Payout Funds and the Schwab Monthly Income Funds.

The second type is a payback policy. A payback policy is designed to repay your initial investment over time and has a specified maturity date, at which time the fund closes and any remaining principal is returned. The fund is structured to totally liquidate by this maturity date. Your payment is designed to rise with inflation. If the market performs strongly in any given year, your payments may increase the next year. Likewise, poor market performance could lead to decreased payments. You can sell the fund before the maturity date, but you will receive less than your initial investment because the fund has been returning your principal amount. Examples include Fidelity Income Replacement Funds and PIMCO Real Income Funds.

Make sure you understand the fund’s investment policy. Some funds hold a broad array of investments that offer diversification. These investments may include U.S. and foreign stocks, real estate and bonds of varying risk levels. Other funds may hold just a single type of investment that generates the income needed to pay investors such as bonds, Treasury inflation-protected securities (TIPS), or high-dividend paying stocks. The type of investments will determine the risk level of the fund.

Before investing, make sure you read the fund’s prospectus. If you are confused, talk to an independent financial advisor. If a managed payout fund is not right for you, your financial advisor can recommend some other strategies. With a little bit of planning, it really is possible to create that retirement check.

For more information in Pittsburg County, call 918-423-4120 or log onto www.oces.okstate.edu/pittsburg.

LaDell Emmons is the Extension Family and Consumer Sciences Educator for the Pittsburg County Oklahoma Cooperative Extension Service. Contact her at ladell.emmons@okstate.edu or 918-423-4120.

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