Payout Funds: Why I Don't Recommend Them

Question: What’s your opinion of these new “payout funds” being touted by some of the big mutual fund companies? Are they any good? -Meg, NYC

Answer: Meg, the jury is still out on these payout funds. They’re just too new and I personally don’t recommend them at this point in time. Here’s why.

Unlike an annuity, where you can give up control of your assets to an insurance company, you actually keep control of your money with payout funds. The goal here is to reduce volatility and generate a steady stream of income from your portfolio for a certain number of years. Payout funds have been developed by large fund companies such as Vanguard, Fidelity and Charles Schwab because so many baby boomers will be retiring without pensions.

Some of these new payout fund products will ask you to choose a set period of time such as 10 years, 20 years, or even 30 years that you want to receive income. In essence, the fund company will try to manage your income for 1-3 decades for an annual cost of 0.5 percent to 1.9 percent.

But is it worth the cost? Some payout funds try to return at least some of your initial investment, while others hold on to those dollars to try to enlarge your monthly payments. The downside to payout funds is that there is no guarantee that your income will last, or that the size of your monthly checks will remain the same. With annuities your income can stay the same however that “guaranteed” income is subject to the claims paying ability of the insurance company.

Bill’s Bottom Line: I’ve found that if you broadly diversify your holdings, and you have realistic withdrawal expectations, you won’t need to pay an insurance company or mutual fund company to manage your income in retirement. I’ve also found that a diversified investment portfolios performance often times will exceed whatever minimum protections the insurance company guarantees or payout funds provide.

Bill Losey, CFP®, CSA, America's Retirement Strategist®, is the resident retirement planning expert for On the Money. He has been named one of America’s Top Financial Planners and is the author of Retire in a Weekend!. The Baby Boomer’s Guide to Making Work Optional. He also publishes Retirement Intelligence, a free weekly award-winning newsletter. Bill can be reached online at MyRetirementSuccess.com.