income replacement funds

What is The Deal With Income Replacement Funds?

By Ray on April 28, 2008

The hottest trend for investment firms is planning for income distribution for the Baby Boomers. As the Boomers age they are seeking investments that will provide income for their retirement needs. The insurance industry has had a lock on the guaranteed income angle for the better part of 200 years through annuities.

Now, mutual fund firms are trying to get in on the action. The hottest trend, besides ETF’s, are income replacement funds which will allocate the investors money and then start to pay a stream of income after a set number of years. The income is derived from income paying securities, dividends and good old fashion withdrawals. The big question is will these products work?

Well the jury is out because all of these products are brand new and have zero track record. With the existing strategies it seems feasible that they will work if the market only goes up and interest rates increase, but then again all investments look good in that scenario. The truth is only time will tell.

They can as part of a diversified portfolio, but not as a stand alone solution. Like investing at any point in a persons life diversification is key and having guaranteed income mixed in with mutual funds can make perfect sense. In a recent article a person from Morningstar was even quoted as saying that for guaranteed income the variable annuity, with living benefits, makes much more sense than just income replacement funds.

While some annuities are less than appealing, EIA’s for example…huh, hum, Steve, a variable annuity with a living benefit can provide guaranteed income along with inflation protection by keeping money invested in equities. As with any type of investment a variable annuity should be considered an asset class and not as a stand alone solution. By using mutual funds and an Annuity the investor will reduce their risk and improve long term returns, Ibbotson has proven this.

The only thing is how do you know what variable annuity is good and which ones are below par? Sign-up for Annuity IQ to find out.