Turn Savings Into Retirement Income

Baby-boomers are about to start tapping a lifetime of retirement savings. The $16-trillion question is how to turn that pile of cash into an income stream you can't outlive.

The quick answer: There's no quick answer. "Any retirement solution will be only a piece of the puzzle," says Jonathan Shelon, co-manager of the new Fidelity Income Replacement funds. Heavy hitters Fidelity and Vanguard have recently come up with solutions that will appeal to different groups of retirees.

Fidelity's approach. Fidelity's new funds offer a unique approach that combines asset allocation with withdrawals. Essentially, they are mutual funds with an expiration date. You select a target date, currently from eight to 28 years, and receive monthly payments until the fund is exhausted. Payments are set for a year at a time, and may rise (or fall) in subsequent years depending on market performance and payout rates.

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Because of the set time frame, payouts are larger than the typical 4% initial annual withdrawal rate recommended for retirees, who must take a cautious approach to try to make their money last a lifetime. But the limited time frame also means the funds are depleted by a preset date, so this option is not appropriate for all your savings.

Instead, you could use them as an income bridge or for specific spending needs, such as a travel budget. For example, say you're 55, work part-time and plan to collect Social Security at 65. You could use Fidelity's 2018 Income Replacement fund to supplement your income for the next ten years. If you invested $200,000, you would receive $19,160 the first year, spread out over 12 equal monthly payments, based on the fund's initial payout rate of 9.58%.

That rate would gradually increase to 100% of the fund's balance in the final year. But the actual dollar amount could fluctuate from year to year depending on market performance. (The longer your time horizon, the smaller your initial payout rate. The 2028 fund with a 20-year timeline, for example, pays out 6.10% the first year.) You can cash out your funds or switch among them at any time.

Vanguard's strategy. Vanguard's soon-to-be-available managed-payout funds take a different tack. They are designed to provide retirees with current income without consuming capital so their portfolios can continue to grow. "Our shareholders are interested in having the flexibility in their later years to meet unexpected expenses or to leave money to family members," says Ellen Rinaldi, head of Vanguard's retirement services.

Investors may choose from among three managed-payout portfolios with distribution targets ranging from 3% per year,for those primarily interested in growth, to 7%, for retirees who need more income. The low-cost funds, with estimated annual expenses of 0.34%, will invest mainly in Vanguard domestic and international index funds, as well as inflation-protected securities and money-market funds.

Income for life. Both companies address retirees' concerns about generating steady income while protecting against future inflation. But neither tackles the biggest financial risk of the 21st century: living longer. Aside from a traditional pension or Social Security benefits, only an insurance product, such as an immediate annuity, can guarantee income for life.

But the trade-offs are giving up control of your assets and leaving nothing for your heirs -- neither of which is popular with retirees. In 2006, immediate annuities accounted for less than 1% of sales of all insurance investment products.

The newest generation of annuities is more attractive. You can change your payout amount, withdraw funds for an emergency or guarantee payments to your beneficiaries if you die prematurely. But each of those features reduces the amount of your monthly check.

It's up to you to create your own plan for retirement income. You have a growing number of choices, and there are a lot of right answers.