'Coupon-Clipper' Funds Emerge

The bear market has been particularly cruel for people who just retired and immediately saw their nest eggs chopped nearly in half. The losses may not even be recovered in 10 or 20 years.

The damage highlights a key question most investors face: How much can you afford to withdraw annually from retirement savings? Financial advisers agree that there is no easy answer. Investors who take big withdrawals during a downturn can exhaust savings quickly. Those who delay withdrawals may be belt-tightening needlessly.

Some of the most intriguing approaches to withdrawals have been devised by Vanguard Group and Charles Schwab(SCHW Quote) for their managed payout funds. Introduced in the past year, the funds are designed to provide retirees with monthly checks.

In some respects, the Schwab approach resembles what was once called coupon clipping. Decades ago, wealthy families carefully avoided touching their principal. For income, they spent stock dividends and bond interest payments -- or coupons. The strategy worked well in much of the 1940s and 1950s when the dividend yield on the S&P 500 topped 6%.

But over the years, stock prices rose, and S&P yields fell, hitting a low of 1.1% in March 2000. The skimpy yields discouraged the coupon-clipping strategy and caused investors to focus on achieving capital gains. In recent years, many financial advisers have told fund clients to reinvest dividends and sell shares to cover expenses.

Now that stocks have collapsed, the yield on the S&P 500 is back above 3%. Retirees can again consider living on dividends, and the old coupon-clipping strategy has found new life in Schwab Monthly Income Fund--Moderate Allocation(SWJRX Quote). The fund invests in a portfolio of stock and bond funds. Stock dividends and bond income are paid out to shareholders who may choose to leave the principal untouched. The fund's current yield is 3.8%.