Funds Intended to Stretch Retirees' Savings
As life expectancy rates climb, more baby boomers are facing the possibility of outliving their nest egg. In response, a growing number of money-management firms are creating mutual funds that primarily invest in bonds but also add some stocks. The idea is that the growth that stocks can provide will help retirees stretch their savings. Over the past few months, First American, RiverSource, and Van Kampen have all rolled out funds of funds that follow this strategy. The funds, in other words, invest in other funds under the company's umbrella.
The latest addition to this group is First American's Income Builder, which launched at the end of May. The fund targets an equal mix of First American High Income Bond, U.S. Government Mortgage, Real Estate Securities and Large Cap Value funds. An asset-allocation committee, made up of managers from each fund, can deviate from the target allocation based on shifts in the markets and their forecasts. Each fund in Income Builder can stray 15 percentage points in either direction from the 25% neutral allocation. With Income Builder, "you get both an emphasis on income and capital appreciation over time -- all with low volatility," says First American's chief economist, Keith Hembre. The fund, which will pay a monthly dividend, is expected to yield 4%.
Currently, the fund's allocations to the large-company, mortgage, and high-yield funds are each slightly more than 25%, while the real estate fund is "relatively significantly underweight based on expected returns and volatility over the next 12 months," Hembre says.
First American funds, which are generally sold through brokers and other third parties, impose sales charges. Income Builder's class A shares (symbol FIAAX; 800-677-3863) levy a 4.25% front-end load. Annual expenses are 1.23%, reflecting the fees of the underlying funds.
An excellent no-load alternative is T. Rowe Price Spectrum Income (RPSIX; 800-638-5660). This fund of funds invests in nine other Price funds to give you exposure to an array of bond-market sectors -- including corporate, international, and government bonds. Spectrum Income's portfolio includes an 18% stake in funds that invest in income-producing stocks. The fund, which yields 4.4%, has returned an annualized 8% over the past 15 years. Annual expenses are 0.73%.