Riding the retirement wave

Since he retired from the light-freight business eight years ago, Billy Miles and his wife have been living off the income generated by his eight mutual funds.

Mr. Miles, 64 years old, now living in Pawleys Island, S.C., doesn’t like the idea of buying a conventional annuity to augment the Social Security he and his wife collect, mainly because he doesn’t want to give up control over his nest egg: He would have to hand over a big chunk of his savings to an insurance company in return for the annuity’s steady check for life. He also worries about expenses and the complexities of some newfangled annuities.

”My own portfolio yields just a little over 3 percent, and that’s sufficient for me,” says Mr. Miles.

Mutual-fund companies are targeting retirees like Mr. Miles – and the 78 million baby boomers behind him who begin turning 62 this year. As waves of boomers leave the work force, many will turn from pumping money into their fund accounts to pulling it out. Mutual-fund companies want to ride this wave as well as they rode the one that has helped many boomers amass million-dollar nest eggs.

In their effort to continue profiting from the generation born between 1946 and 1964, fund companies have one big thing going for them: Many boomers are put off by annuities. A study by AARP last year found that the most risk-averse respondents were also the least open to annuities. Jean Setsfand, director of financial security at AARP, says even conservative investors saw ”less value” in the guarantee feature of annuities because they were more worried about losing access to their savings. ”The loss of liquidity is a big issue for many people,” she says.

Also, many individuals are wary of annuities for fear of hidden fees and because they feel they don’t know how their money is being used. ”Transparency has been an issue with the annuity industry,” says Ben Pousty, a senior analyst at research firm Corporate Insight Inc., New York.

So, mutual-fund companies are taking advantage of this opening to roll out new products that provide a periodic check in the mail – thus hoping to keep their clients’ money with them for years and possibly attract new ones.

The new products tap into the success of the target-date retirement funds promoted heavily in recent years. Target-date funds are a convenient way for many investors to buy both stocks and bonds, with the manager automatically changing the allocation as the fund approaches the targeted retirement date, gradually taking on a more conservative mix.

Similarly, the new ”target distribution” or ”managed payout” funds invest in stock funds, bond funds and other asset classes. They allow investors to withdraw their money anytime, like a regular mutual fund, and the account balance can be passed along at death. The checks come regularly, sometimes monthly, and are usually tied to fund performance.

The catch: There generally aren’t guarantees. The amounts paid out by the funds are based on a percentage of asset values and so will fluctuate based on market returns. In a protracted bear market, investors could see their nest eggs’ values plunge. ”These things can give people a false sense of security, depending on how they’re sold,” says Ron Weiner, a financial planner in Westport, Conn.

In recent months, five companies have launched these funds, including Fidelity Investments and Vanguard Group Inc. John Hancock Funds, a unit of Manulife Financial Corp. expects to launch a Retirement Income fund this summer, and at least two other fund firms – American Century Investments and T. Rowe Price Group Inc. – are working on similar products. Industry analysts and executives expect more to jump on board.

The products are arriving at a time when personal nest eggs have become a more important source of retirement income. Last year, 52 percent of workers with annual incomes of $50,000 to $100,000 said they planned to rely primarily on 401(k) plans and Individual Retirement Accounts to pay for living expenses once they stop working, up from 46 percent in 2006, according to a survey released in February by the Transamerica Center for Retirement Studies, a nonprofit funded by Aegon NV’s Transamerica Life Insurance Co. The percentage counting on Social Security also grew, to 19 percent from 13 percent, while those counting on company pension plans dropped to 11 percent from 18 percent. What’s more, individuals are living longer. Many boomers are expected to reach their 90s.

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