NEW YORK (
) -- Suppose you are a retiree with $500,000 invested in mutual funds, and you need $2,000 a month to live.
To insure a reliable income stream, you must make a series of complicated choices. First you must pick funds that can generate enough income to last for years. Then you must monitor the portfolio carefully. If the market tanks, you may need to reduce your withdrawals.
To offer a simpler solution, money managers have developed managed payout funds. These diversified portfolios make monthly payouts and adjust them to account for market fluctuations. Companies that have begun offering the mutual funds in the last several years include Fidelity Investments, Vanguard Group, and
. So far the funds remain a niche product with only $800 million in assets. But that could change as millions of Baby Boomers retire and look for convenient ways to obtain reliable income.
With markets rising lately, the payout funds have been recording solid returns and making scheduled payments. But shareholders should be aware that the income payments are not guaranteed. Prolonged bear markets could erode returns and result in lower monthly paychecks.
Among the most conservative choices is
Schwab Monthly Income Moderate Payout
. The fund seeks to pay out 3% to 4% of assets annually. To generate income, the portfolio keeps 60% of assets in cautious bond funds. The rest of the payout fund's portfolio is in dividend-paying stock funds.
Schwab's portfolio managers aim to generate enough interest and dividend income to cover all the monthly payouts. The idea is to avoid touching the principal. This cautious approach is different from many competitors who aim to achieve strong total returns by focusing on stocks. "Our goal is to provide a steady payout to our clients -- and not necessarily to deliver higher total returns than our competitors," says Omar Aguilar, chief investment officer for equities of Charles Schwab Investment Management.
Because of its big bond stake, the Schwab fund has excelled in downturns and trailed competitors in rallies. During the last three years, the fund returned 13.4% annually, lagging 63% of retirement income funds, according to Morningstar.