Good Idea, Bad Timing

Mutual Funds

Good Idea, Bad Timing

Sagging stock prices force retirement-income funds to trim their payouts.

How does this sound for a deal: You invest with a mutual fund company, and it returns your own money piecemeal -- and charges you a fee for the privilege. In effect, that's what happened last year to investors who jumped into so-called managed-payout, or retirement-income, funds. It's a case of a good idea falling victim to very bad timing.

These funds work by investing money in a broad portfolio of stocks and bonds, then sending monthly payouts to shareholders. Returns on the underlying investments are supposed to provide some or all of the payout. But most of these funds launched in 2008, when there were no returns. So investors ended up receiving a portion of their principal paid back to them.

As a result of last year's losses, payments will shrink in 2009. For example, Fidelity's Income Replacement funds promise to make monthly payments until a set expiration date. Say you invested $100,000 in the 2016 fund at the beginning of 2008. You would have received monthly payments based on a fixed percentage of assets -- in this case, about $1,000. But by year-end, because of the $12,000 in payments and the lousy market, your account would have been worth just $71,300, and your monthly payments this year would fall to about $800. The other providers of managed-payout funds, including Vanguard and Schwab, experienced similar shrinkage.

That's unfortunate, the fund companies say, but the managed-payout strategy never guaranteed a stream of stable income. Instead, the funds' main advantage is to provide a disciplined way to tap a nest egg. In tough times, your payment automatically resets annually so that less money is withdrawn.


Unlike annuities, retirement-income funds allow you to withdraw your money without having to pay a penalty. But doing so won't make up for the losses you've already suffered. Selling also raises the question of what you'll do with the proceeds. The best course may be to do nothing because the bear market will end eventually.