The Fountain of Forex

Targeted-Distribution Funds May Crack Nest Eggs

As more traditional pension funds are fazed out by employers, it is becoming increasingly important for investors to seek ways to build savings to support themselves without assistance from an employer or the government. Current retirees, and those that will follow, want their investment portfolios to provide a steady stream of retirement income. The financial services industry has responded to these needs by developing targeted-distribution funds. These are mutual funds that provide retirees with a relatively steady stream of income similar to an annuity, but with the flexibility to sell the fund when you need to.

In this article we'll introduce the concept of targeted-distribution funds and will discuss the advantages and disadvantages that should be considered before incorporating these vehicles into any retirement plan. (For five steps to help you replace an employer pension fund, read Chipping Away The Pension Freeze Trend.)

Targeted-Distribution Funds
Targeted-distribution funds are also referred to as open-end managed-payout funds. Open-end simply means that they are mutual funds, and can be bought and sold on a daily basis, unlike closed-end funds. The initial wave of targeted-distribution funds come in two main varieties:

• One version seeks to provide a specific monthly payout in dollars and cents.
• Another seeks to provide a percentage of the assets in the account.

While both of these approaches can and have been implemented by individual investors in their own portfolios, these funds provide professionally managed portfolios specifically designed to deliver predictable payouts. The idea being that the fund managers will adjust the portfolios, taking more aggressive positions during difficult markets, for example, to meet the desired payouts.

Structure
In funds designed to generate a specific dollar amount each month, the portfolio seeks to generate a specific rate of return in order to meet the desired cash flow requirement. As mentioned above, the strategy is adjusted based on market conditions, taking a more aggressive approach when good returns are hard to find and scaling back the level of risk when markets are better.

In funds designed to provide a percentage of the underlying assets, a target date is set (for example, 20 years after the year you stop working), and the portfolio's earnings and underlying principal are slowly returned to you over the course of the time period. Each year, the amount of the monthly payment may change, based on the amount of money in the account and the portfolio's performance. When the end of the time period is reached, the balance in your account is zero. In these portfolios, the mix of underlying investments begins with a larger weighing toward stocks and shifts towards bonds as the years pass.