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 $100,000 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:
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…
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