Safe Ways to Spend The Nest Egg

Vanguard has a total of $189 million in its managed payout funds.

Both Fidelity's and Vanguard's funds have relatively modest costs. But it is also important to keep in mind that they are mutual funds and have no guarantees. Since they are mutual funds, investors can sell the funds, if need be. For instance, if your situation changed and you needed faster payouts, you could sell or exchange a longer-horizon fund for a shorter one. And both allow investors to suspend taking distributions. Payout funds appear to be a potentially useful product for some retirees, and other companies are likely soon to be offering similar products.

Additional thoughts on converting to a Roth IRA: I wrote about deciding to convert part of a traditional IRA to a Roth because the market was down and because I expect tax rates will go up. (Obviously if you expect your tax rates to go down, you would not want to convert.)

The IRA expert I consulted for my column said that both the bear market and the expectation of higher taxes were good reasons to convert, but what I didn't realize was that the source of the dollars used to pay taxes on my conversion would make a difference, especially if my tax rate stays the same. Calls and e-mails from readers and a subsequent discussion with experts at T. Rowe Price have convinced me that when the market is down, if you pay the taxes on the conversion from a taxable account, instead of from your traditional IRA, you may be able to save money on your taxes. That would leave you more money to invest long-term and more assets in your Roth IRA that you can withdraw in the future tax-free.

However, if you withdraw the money to pay the taxes from your traditional IRA, you may pay less in taxes in the short run, but this will not improve your final after-tax ending balance in the future. Conclusion: to take advantage of a down market, convert to a Roth using assets in your taxable account to pay the taxes.

My thanks to several readers for pointing this out.

Join Martha Hamilton and Jason Scott, retirement research director for Financial Engines, for an online chat at washingtonpost.com at noon on Tuesday.