'Coupon-Clipper' Funds Emerge

In a similar manner, advisers prefer to adjust monthly payments every year or two. Say a client has a portfolio of $1 million and the adviser wants to pay out 4% of assets annually. During the first year, the client would receive $40,000 spread over 12 months. If the portfolio shrinks to $800,000, then in the second year, the adviser might only pay out 4% of the reduced total, or $32,000. In this Vanguard-style approach, the client can prepare a budget because he knows in advance how much the monthly checks will be.

An investor using the Schwab-style strategy may have more trouble preparing a budget. As dividends vary, payments can change every few months. But in a bear market, those following the coupon-clipper approach can have some peace of mind. By seeking to live on dividends and interest payments, the investor avoids digging into principal. That could enable a retiree to preserve his nest egg for years.