Niche funds give investors steady monthly payments in retirement
Some investors looking for steady income in retirement are turning to managed payout funds. There are just a handful of these niche mutual funds, which pay monthly income to investors, Morningstar portfolio strategist Amy Arnott said. They could be attractive for those who want the income without having to manage the distributions from the retirement accounts themselves, she noted. Schwab offers three such funds: Schwab Monthly Income Fund – Income Payout (SWLRX), Schwab Monthly Income Fund – Flexible Payout (SWKRX) and Schwab Monthly Income Fund – Target Payout (SWJRX). “What they are designed to do is take the confusion out of income investing,” said Inga Rachwald, a senior investment portfolio strategist at Schwab Asset Management. “Every month the client gets a payout based on the income that the portfolio is generating so that it feels like a monthly paycheck.” The payout on the Monthly Income Fund is going to depend on the interest rate environment because about 70% of the assets are in fixed income and 30% are in equities. In a normal rate environment, investors can expect an annual payout of 3% to 5%. In a low-rate environment, it can be 0% to 3% and in a high-rate environment investors can see more than a 5% annual payout. It has a net expense ratio of 0.21%. The two other options are split 50/50 between equities and fixed income. The Schwab Monthly Income Fund – Flexible Payout (SWKRX) is structured like the name implies — the annual payout is flexible, between 4% and 6%. The Schwab Monthly Income Fund – Target Payout (SWJRX), on the other hand, aims to offer a 5% annual payout. Both have net expense ratios of 0.25%. Managed payout funds are not offered in many defined contribution plans, such as 401(k)s. In fact, a 2022 Cerulli survey of defined contribution plan consultants showed just 17% of the plans offered any managed payout funds. However, the funds saw the greatest percentage increase in use, 10%, compared to 2021 survey results, the firm found. “Typically, we see clients interested in these funds who are self-directed investors,” said Schwab’s Rachwald. “They may have a 401(k) elsewhere. They may be taking their required minimum distribution, but maybe they want some additional sources of income.” Many may also be cautious of annuities , an insurance product which also offers monthly payments. Unlike annuities, managed payout funds have liquidity. “With an annuity, you might be able to get a higher income stream monthly but you are also basically losing access to that money,” Morningstar’s Arnott said. “You don’t have the flexibility to withdraw if you have a sudden need for liquidity or if you pass away, in a lot of cases your family will not inherit the annuity proceeds.” Still, investors should first have a plan. Assess when you need the income to start, what assets you have to generate that income and how long you’ll need the money to last, Rachwald said. Then, decide how you want to invest. If you decide on a managed payout fund, make it just a part of your overall portfolio, Arnott said. Brett Lozowski, a certified financial planner with Life Planning Partners, doesn’t recommend monthly payout plans to clients. Instead, he creates individualized portfolios focused on total returns. “We are really tailoring our portfolio to meet our clients cash-flow needs,” he said. “When they need cash, we have control over the areas we can pull from.”
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