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One solution to make retirement funds last for life

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(Bloomberg Business) — They’re having another go at it: turning your retirement savings into an income stream that will last for the rest of your life.

The problem is simple: You don’t know how long you’ll live, so it’s hard to know how fast you can afford to spend your nest egg.

When you retire, you can give your money to an insurance company, which will send you a monthly check for the rest of your life. But annuities’ fees can be high and their terms complex; and many retirees don’t want to tie up their money.

The price of a dependable income into your 90s and beyond is the chance that you’ll die younger and never get to enjoy it. Last year, $229.4 billion in annuities were sold, the Insured Retirement Institute estimates. That’s up 4 percent from 2013, but less than sales in 2009 and earlier, even though the number of retirees keeps rising each year.

A generation of “managed payout funds,” launched in 2007 and 2008, was supposed to be the solution. But hardly any investors use them.

Now, Natixis Global Asset Management is launching a “retirement spending account” designed to deliver a predictable monthly check to retirees for life, and as millions of baby boomers get ready to retire, there are signs that other fund companies and retirement plan providers are also working on new retirement income products. 

An investment account is more flexible than an annuity: If there’s an emergency, you can sell it. If you die young, your heirs get the proceeds. But there’s no guarantee it will last if you live longer than you expect.

Natixis addresses that uncertainty by adjusting its product’s risk as investors get older. Because a market downturn early in retirement can really screw up your plans, the product’s investments are conservative for the first years of retirement. By 15 years in, almost half the investments are in stocks, which are riskier than bonds but provide bigger returns.

That should help the money last longer, said Edward Farrington, executive vice president of retirement at Natixis. Then, as investors move through their 80s and 90s, the product gets more conservative again, to preserve money for heirs. Natixis investors can choose to get either 4 percent or 5 percent of their accounts’ assets each year, in monthly checks adjusted annually for inflation. To get the 5 percent payout, investors need to take more risk, raising the odds that the money will run out in their later years.

Another downside to the Natixis product is its annual fee of about 1 percent of assets per year. Because it is sold only through financial advisers, that’s on top of any fee they charge for their advice.

Managed payout funds, an older effort to deliver retirement income, are simpler versions of the Natixis product. They don’t adjust investment risk as you get older, but they do provide a monthly income.

The largest, the Vanguard Managed Payout Fund, aims to give a 4 percent payout, with the payments adjusted each year based on performance over the last three years. It’s cheaper than the Natixis fund, with a fee of 0.42 percent a year.

So far, managed payout funds have collected just $2 billion to $3 billion in assets, Morningstar analyst Jeff Holt estimates. Compare that to the $25 trillion in all U.S. retirement funds, according to the Investment Company Institute.

Last year, Vanguard folded three different payout funds into one. “They really didn’t gain much traction,” Holt said of the whole category.

It remains to be seen if the Natixis product, which went on sale Friday, can do much better. It may have some new competition, too. American Funds, the third-largest U.S. fund company, has filed paperwork to launch “retirement income portfolios” in three varieties, “conservative,” “moderate,” and “enhanced.”

Spokespeople didn’t respond to requests for comment. Others seem to be on the way, Holt said. “A lot of fund managers are at the drawing board,” he said, and as of now “there doesn’t seem to be a clear answer.”

One solution would be an easier way to mix investment funds and annuities. Retirees could get a guaranteed monthly check, along with a small fund for emergencies or inheritances.

Last year, regulators at the U.S. Treasury and the Department of Labor made it easier for retirement plans to do this. They want 401(k)s to start including annuities that would pay a guaranteed income to workers when they retire. So far, no one’s taken them up on the idea.


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