If the following type of mutual fund is offered in your employer sponsored 401k plan, are you going to consider to add it to your portfolio?
Predictable Lifetime Income. You are guaranteed for life an annual income payment whenever you decide to start taking income withdrawals. The income payment is calculated off the highest value your mutual fund has ever achieved. For example, suppose your income is set to be 5% of your asset value, and suppose your initial asset is $10,000, and it hit $12,000 and then falls back to $8,000, your guaranteed annual income will be 5% x $12,000.
The 40-60 Allocation. The fund will invest 40% of its asset to fixed income products such as bond and 60% to stocks.
Flexibility. You can add funds or withdraw funds at any time, and ultimately pass your assets onto your estate without penalty.
Low Cost. The annual cost for the fund is 1.00%.
I was asked to fill out a survey regarding to this type of fund today. After going through the survey, my first reaction was that the mutual fund companies are really hurt by the recent market turbulence and hence have to come up with "new" products to attract potential investors. Though the idea of guaranteed lifetime income sounds appealing, I have several major concerns before expressing my accolades:
Predictable Lifetime Income. You are guaranteed for life an annual income payment whenever you decide to start taking income withdrawals. The income payment is calculated off the highest value your mutual fund has ever achieved. For example, suppose your income is set to be 5% of your asset value, and suppose your initial asset is $10,000, and it hit $12,000 and then falls back to $8,000, your guaranteed annual income will be 5% x $12,000.
The 40-60 Allocation. The fund will invest 40% of its asset to fixed income products such as bond and 60% to stocks.
Flexibility. You can add funds or withdraw funds at any time, and ultimately pass your assets onto your estate without penalty.
Low Cost. The annual cost for the fund is 1.00%.
I was asked to fill out a survey regarding to this type of fund today. After going through the survey, my first reaction was that the mutual fund companies are really hurt by the recent market turbulence and hence have to come up with "new" products to attract potential investors. Though the idea of guaranteed lifetime income sounds appealing, I have several major concerns before expressing my accolades:
- The idea of the guaranteed lifetime income essentially adds to the fund a saving account feature, and thus makes the fund appear to be less risky. For us investors, we need to concern whether this guaranteed income rate is a fixed rate set when the fund is initially purchased and remains fixed during the course of withdraws or it actually fluctuates. We also need to concern whether this guaranteed lifetime income is calculated in a compounding manner.
- 1% annual cost is not that low. There are plenty of index fund out there that have cost below 0.5%. We need to ask about the turn over rate and hence the estimated associated commissions because these are another huge cost when it comes to investing in mutual funds.
What's your take on this?
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