It's tough enough to figure out how much money you need to have stashed away in order to retire. As you reach retirement age, the big worry is how much you can spend every year and still make your money last as long as you do! Now Fidelity Investments is launching two new products to help boomers do the double job of investing -- and withdrawing -- their retirement funds with a greater degree of confidence.

A new series of "Income Replacement Mutual Funds" are each designed to self-liquidate, creating a stream of flexible payments that distribute both principal and growth to provide for retirement income. The funds offer the opportunity for growth and the flexibility of adding additional cash, or making additional withdrawals, all without penalty. At the target date of maturity, both income and principal will be totally withdrawn. But the mutual funds don't promise a check a month for life, or a death benefit, such as you'd find with traditional annuities.

So at the same time, investors might want to consider Fidelity's new Guaranteed Withdrawal Benefit Annuity, its version of an increasingly popular type of annuity that offers a protected, lifetime monthly check that can grow based on investment returns. This product offers a lifetime payout promise, upside protection from inflation not found in traditional immediate annuities and a death benefit to survivors. But it costs more and is less flexible.

These two products form a potent attraction for a generation that will be the first to retire without a guaranteed monthly pension check. Combining these products in a retirement plan can alleviate worries about "running out of money" and about the diminishing purchasing power of a fixed monthly check from a more traditional annuity.

Fidelity Income Replacement Funds

The Income Replacement funds start with the concept of Fidelity's Freedom Funds target-date retirement funds. But unlike the Freedom funds, which are designed to grow your principal up to the targeted retirement date, becoming more conservative as that year approaches, these new Income Replacement Funds are designed to "self-liquidate" by the target date. They maintain an annually-adjusted stream of monthly income until the fund is completely depleted.

Clearly, this type of fund is not designed for all of a retiree's assets. But since the growing worry for many retirees is having the security of a monthly check without locking themselves into a withdrawal plan that might not keep up with inflation, these funds tiptoe through the middle ground. They are designed to put a stream of spendable cash in a retiree's hands over a fixed period of years, alleviating the worry about spending down assets too soon.

The Fidelity Income Replacement Funds will be offered in two-year increments, ranging from 2016 to 2036. Like the Freedom Funds, they invest in a range of other Fidelity funds.

The amount of the monthly payment will be determined and adjusted every year, based on Fidelity's quantitative analysis. The monthly payment will remain the same throughout the year. Additionally, the individual has the flexibility to turn this feature on or off at any time, sell the fund investment or add money to the fund at any time.

This "stream of income" is similar to an annuity. But there are big differences. Unlike an annuity, there are no guarantees that the Income Replacement Funds' payments will last for the owner's lifetime, only until a fund is depleted at the taret date. That's why most people will want to have a series of funds with different target dates for different needs -- travelling early in retirment or covering possible medical expenses later.

And while Fidelity will adjust the payments to keep up with inflation, there's no guarantee they won't diminish if the funds' investments go bad.

On the plus side, the Income Replacement Funds have much lower fees than annuities and are much more flexible. The expense ratio is a relatively low 65 basis points for the 30-year fund and drops substantially for shorter-dated funds, which are invested in more conservative assets. Fidelity says its investors may want to invest in several funds, each of which will provide a different monthly check.

Vanguard Managed Payout Funds

There is growing urgency to provide this kind of payment service to retirees who are staring into the terror of not only managing their retirement assets, but determining how much they can withdraw and still leave money invested for current growth and future withdrawals. Vanguard also recently filed with the SEC for a series of "managed payout" funds designed to provide level monthly payments each year, adjusted yearly to reflect the funds' performance in the previous three years. But these Vanguard funds will distribute income only, and preserve capital, while the new Fidelity funds are designed to liquidate by distributing both the original investment and the income.

The Vanguard funds solve the "withdrawal problem" for those who have significant assets that they hope to outlive and leave to their heirs. The Fidelity approach assumes that the broad majority of retirees who will roll over their 40l(k) accounts just hope to make their money last as long as they do!

Given the greatest uncertainty of just how long that lifetime will be, these "just enough" retirees will probably want to combine these new Fidelity funds with an annuity that guarantees some form of monthly check as long as they live.

Fidelity Growth and Guaranteed Income Annuity

For those who want absolute certainty that they won't run out of money, Fidelity has also introduced its own version of popular "living benefits" annuities. The Fidelity Growth and Guaranteed Income tax-deferred annuity offers two tax-deferred investment portfolios that are actively managed by Fidelity. This annuity offers guaranteed lifetime income when the owner chooses to "turn on" the guaranteed withdrawal benefit, at any time after age 59 ½.

Best of all, the monthly income check will be adjusted upward every year on the anniversary of purchase, to reflect gains in the underlying investment account. But if the investment portfolio declines in value, the monthly check can never be reduced from its highest annual value -- as long as the owner sticks with the monthly withdrawal program.

Upward adjustments stop at age 85, but monthly checks will continue for the rest of your life once you start the withdrawal program. (By age 95, you must annuitize or surrender if you haven't started a withdrawal program.) When the owner dies, any remaining balance goes to the named beneficiary.

The Fidelity annuity does lack some significant provisions and choices of other similar annuities, according to independent annuity expert Jeffrey Oster of Raymond James. He notes that similar annuities offered by Prudential and John Hancock provide more varied investment choices. They also guarantee at least a 5% increase on the initial investment base annually, even if the value of the investment portfolio declines -- a guarantee Fidelity does not provide.

And these other companies provide a death benefit that guarantees at least a return of the original principal investment, less withdrawals, while the Fidelity contract returns only the remaining market value when the owner dies.

These differences may help explain why Fidelity can brag about its lower-than-average expenses of 110 basis points per year for a single life and 125 basis points annually for a joint account -- a figure about 40% below the industry average. Fidelity's annuity also has surrender charges of 2% on withdrawals made during the first five years that exceed the guaranteed monthly benefit amount, or required minimum distribution if the annuity is held in a retirement account. There are no surrender charges if the owner dies.

These are the first of many new products on the drawing board of financial services companies hoping to cash in on boomer retirement assets -- even as they help boomers cash in as well! And that's The Savage Truth.

Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated, and she released her fourth book, The Savage Number: How Much Money Do You Need? in June 2005. Savage was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. A Phi Beta Kappa graduate of the University of Michigan, Savage currently serves as a director of the Chicago Mercantile Exchange Corp. She also has served on the boards of McDonald's and Pennzoil.

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