Preserve Your Savings for Life

Or say you and your spouse are both 65 and would like some added income to supplement your pension and Social Security benefits. If you invested $200,000 in the Fidelity 2026 Income Replacement fund, you would receive a 6.5% payout, or about $13,000, the first year, with the possibility of higher payouts in subsequent years until the assets were exhausted 18 years later.

But don't tie all of your assets to your life expectancy. Although the median life expectancy for a 65-year-old is 83, half of that age group will live longer. If you're one of them, you could be out of luck if your funds expire before you do.

Although the Fidelity Income Replacement funds don't offer guaranteed income for life, they offer plenty of flexibility. You can stop payments, switch funds to shorten or lengthen your payout schedule, or withdraw all your money at any time -- without paying a fee. "We've created a vehicle that allows you to change your plans on the fly," says Jonathan Shelon, co-manager of the funds.

Balance income and growth

If you don't like the idea of mutual funds with an expiration date, take a look at Vanguard's new retirement-payout funds. They're designed to help retirees balance their current income needs against their desire for growth. "Our investors are very interested in having flexibility in later years to cover unexpected costs or to leave money to family members," says Ellen Rinaldi, head of retirement services for Vanguard.

Investors can choose among three portfolios, with distribution targets ranging from 3% a year (for those who need modest income now but want their capital and payouts to grow over time) to 7% a year (for those who need more income now but still want to preserve principal).

Schwab's Peterson says the Fidelity funds seem to "fill a niche for people with specific spending needs." The Vanguard funds, he says, "appear to meet a broader need for income and preserving capital." As with all mutual funds, if you die, the balance will go to your heirs.

You'll have more retirement-income products to choose from in the future, including new retirement-payout funds from Schwab that mimic Vanguard's approach of producing monthly income without chipping away at a retiree's nest egg.

A new generation of annuities

But what these new retirement-income FUNDS don't do is guarantee income for life. Aside from a traditional pension or Social Security, the only product that can promise lifetime income is an annuity. "We find it's best to start out by looking at current living expenses, figuring out how much income you need in retirement, and how much of that income needs to be guaranteed," says Bret Benham, president of TIAA-CREF Life Insurance. "You'd be surprised by how much retirement income people expect to need going into retirement, ranging from about half of their current income to more than 100%," Benham adds, noting that TIAA-CREF provides more retirement income than any single source other than Social Security and has been doing so for nearly 100 years.

A recent study by the Wharton Financial Institutions Center at the University of Pennsylvania found that you could purchase a secure stream of income for life from an insurance company for about 25% to 40% less than it would take to generate the same amount of income from a traditional investment portfolio of stocks and bonds. (That's because you are spending both principal and interest and pooling your risk with other investors.) But you have to be willing to give up control of your assets and have nothing left for your heirs. Most people aren't willing to do either.

Although TIAA-CREF (www.tiaa-cref.org) sticks to traditional low-cost immediate annuities with few bells and whistles, some insurance companies are responding to consumer demand for flexibility by offering a new generation of products that allow you to change your payout amount, withdraw assets for an emergency or guarantee payments to your beneficiaries if you die early. But each feature you choose reduces the amount of your monthly payout.