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NEW YORK ( TheStreet) -- When the markets crashed in 2008, retirees watched helplessly as 30% or more of their savings vanished. Many savers faced the real possibility of running out of money well before they died.
To help retirees avoid such dire situations, financial companies have introduced a variety of vehicles.
Among the most intriguing is a new strategy developed by fund giant
PIMCO and insurer
MetLife(MET - Get Report).
It combines a mutual fund and an insurance policy to ensure retirement security. To avoid running out of cash, a retiree would start by buying a fund such as the
PIMCO Real Income 2029(POIAX). The fund would provide steady monthly income for 20 years. After that, an insurance policy from MetLife could provide income for rest of the investor's life.
The PIMCO Real Income funds rank among the most reliable offerings around.
To protect principal, the funds invest in a portfolio of Treasury Inflation-Protected Securities (TIPS). Some of the bonds mature almost every year. As the bonds mature, the investor receives back principal. By the termination date, the investor receives all the initial principal, and the fund closes. Besides receiving the principal, the investor also gets a steady stream of interest payments. In addition, the value of the fund rises along with inflation.
Say you put $100,000 into PIMCO 2019 at the beginning of 2010. During the first year, you would have received one-tenth of your principal back plus interest and inflation adjustments for a total payment of about $11,500.
That is a modest return, and investors could do about as well by investing in bank certificates of deposit. But there are very important differences between the fund and CDs.
First, the PIMCO investment is a mutual fund. That means investors can take all their money out at any time and not pay a penalty. If you withdraw funds from a CD early, you must pay a stiff penalty.
More importantly, the PIMCO fund protects against inflation, an important threat to retirees. If inflation rises sharply in coming years, as some economists expect, it will erode the value of CDs will be eroded. Retirees who invest exclusively in CDs will face declining purchasing power.