PIMCO Strategy Offers Retirement Security

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).

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.

Investors who hold the PIMCO TIPS fund will not suffer from inflation. To appreciate why, consider that TIPS provide income from two sources. Like any bond, TIPS pay a fixed yield. In addition, the principal value of the bonds rises along with the consumer price index. Say you put $1,000 into TIPS, and the consumer price index rises at a 3% rate in the first year. The value of your holding would rise to $1,030. If inflation rises sharply, the PIMCO fund would likely outperform CDs and Treasury bonds by a wide margin.

Why should retirees buy PIMCO Real Income instead of one of the many inflation-protected funds that have long been sold by Vanguard and other companies? The value of the traditional TIPS funds fluctuates every day along with interest rates and market conditions. So a retiree would not know the value of a typical TIPS fund over the next two decades. With the PIMCO Real Income fund, there is less uncertainty because investors know that they will get at least their principal and interest payments.

Once the PIMCO fund ends, retirees who live past the termination date will lose their income source. To prevent any hardship, the investors can purchase longevity insurance from MetLife. In a typical policy, a 65-year-old man pays $100,000 for an insurance contract. When he turns 85, the retiree would start receiving $66,000 a year for life. The insurer can afford the rich payments partly because it can invest the money for two decades before providing any income. In addition, the policy comes with a catch. If the man dies before 85, he receives nothing back. Because many policy holders will die early, the insurer can make fat payments to those who survive.

So far longevity insurance and the PIMCO Real Income funds remain niche products with tiny followings. But as more baby boomers reach their 60s, the demand for reliable income -- and the retirement security it provides -- will grow. Investors may turn their sights to the growing breed of investments that aim to protect retirees from outliving their assets.

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Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.

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