A Look at Fidelity’s Income Replacement Funds and Vanguard’s Managed Payout Funds

October 9, 2007

Fidelity recently introduced a new kind of mutual fund called an income replacement fund. This kind of fund is managed with the goal in mind of maximizing income by balancing growth investing, income investing, and a return of principal.

They give an example in this video of a woman who wants to invest $100,o00 for 20 years. Her average monthly income from her $100,000 investment is $540. Here’s a look at her projected monthly income based on the year:

Fidelity Income Replacement Example

It’s important to note that these monthly income payments ARE NOT guaranteed. That said, the funds are designed based on the time horizon. In other words, as time progresses, the funds become more conservative. These funds carry an expense ratio around .61%, which isn’t too bad especially when you consider the expenses on most annuities that are designed to do essentially the same thing but with some guarantees.

I think this is an interesting concept that is only going to get more popular. In fact, I read last week in the Wall Street Journal that Vanguard is planning their own versions of income replacement funds called “Managed Payout Funds.” From the article:

Vanguard filed with the Securities and Exchange Commission last week to launch Managed Payout Real Growth, Managed Payout Moderate Growth and Managed Payout Capital Preservation.

Vanguard’s expense ratio on these funds is expected to be around .34% or roughly half of what Fidelity charges.

This is only the beginning…

10 responses to A Look at Fidelity’s Income Replacement Funds and Vanguard’s Managed Payout Funds

  1. Vanguard continues to kick the $^@# out of every mutual fund company on earth. That being said, I still would rather have a well diversified balanced Vanguard index fund portfolio than this type of vehicle. Although, this would make some sense as a small part of bigger portfolio if you were advanced in age.

  2. I love Vanguard. They were really helpful in teaching me about investing. Their website is the best and their fees are the lowest i have seen thus far. I have a target retirement fund and a could other funds with them.

  3. Interesting concept and certainly speaks to the demographic needs of the bulk of investors coming who will be / are retiring. They certainly seem to be going after the low cost market here.

    The Dividend Guy

  4. This is a very good idea. I think this idea will certainly get some traction, and many other mutual fund companies will have similar offerings in the near future. Gearing an investment plan toward a person’s current situation through a fund is a great idea.

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