Fidelity stretches retirement funds
BY TERRY SAVAGE Sun-Times Columnist Oct 8, 2007
Updated: May 3, 2013 12:14PM
Fidelity Investments will offer two new investment products designed to cater to the income needs of baby boomer retirees.
About to debut are a new series of Income Replacement Mutual Funds and a Guaranteed Withdrawal Benefit Annuity.
These two products form a potent attraction for a generation that will be the first in a while 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.
Income replacement fund
The income replacement fund is a new series of targeted mutual funds that start with the popular concept of Fidelity's Freedom Funds -- target-date retirement funds.
The Fidelity Income Replacement Funds will be offered in two-year increments, ranging from 2016 to 2036. Invested on a "fund-of-funds" basis in other Fidelity funds, the portfolios will adjust their risk by reducing the exposure to equities as the target date approaches.
Unlike the Freedom Funds, which simply target a future retirement date, the Income Replacement Funds are designed to be depleted by the target date, through a calculated series of monthly checks. For investors in these funds, Fidelity will offer a unique and flexible withdrawal program that is designed to create a regular monthly payment that will withdraw all the assets of the fund by the time the target date is reached.
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.
The concept looks like an annuity, but without the guarantee of lifetime income, and with much more flexibility. 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. It is expected that investors might invest in several funds, each of which will provide a different monthly check.
The guaranteed income annuity is aimed at investors who want absolute certainty that they won't run out of money.
Fidelity also announced its own version of popular "living benefits" annuities.
Guaranteed growth, income
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 59-1/2.
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.
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.
If your eyes glaze over at the mere mention of annuities and withdrawals and retirement income planning, Fidelity representatives -- or financial advisers -- can use these products to alleviate the worry about making your money last as long as you do. And that's The Savage Truth.
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.