Offering to investors regular income payouts through well-diversified portfolios managed payout funds were originally introduced in the market in the late 2007 in an effort to anticipate the problem of retirement savings and approach effectively the growing concern of failing retirement plans. By providing additional sources of income to investors that seek for regular income payouts at a relatively low-interest rate, managed payout funds list retirement income solutions that cover a broad range from traditional life-cycle funds to life annuities and custom-made withdrawal plans, using the capital to produce returns and offer a monthly stream of income to payback those returns.
To many investors, managed payout funds are directly compared to annuities, only representing a new generation of products. However, they should not be confused to annuities because, unlike annuities, they do not guarantee their returns. Following the serious consequences of the credit crunch and economic downturn that caused major fluctuations in the global markets, managed payout funds do not guarantee their income and are losing their value. However, this is not only a matter of market variability. It is mostly a matter of how these funds are designed.
Unlike traditional mutual funds, managed payout funds use their capital to produce returns. However, in a prolonged bear market, these funds cannot guarantee the payout level and moreover they use the capital that needs to be preserved to generate returns for future distributions. Financial advisors suggest that in majority, investors are not prepared for a sharp decline in their monthly payments, neither these funds can preserve principal with a distribution rate of 6% or 7%. Instead, they suggest that a distribution rate of maximum 5% is more realistic to sustain the expected level of monthly income. Savvy investors can probably tailor a custom-made program that is responsive to the market conditions, but this is not the case for all investors.
Although they can be professionally managed, low-cost, regular income solutions, the diminished capital of managed payout funds is a serious implication. Moreover, it’s their structure that makes it impossible for these difficulties to fade out. Market instability is exposing a great risk for managed payout funds and as long as the markets remain irrational, these funds cannot remain solvent, not eating into principal. Therefore, in the event of a severe market decline in the beginning of the program, investors won’t have funds to cash out in retirement.
Payout level is a serious consideration before deciding to purchase managed payout funds. Investors should think twice because in a prolonged market downturn the fund will most likely eat up its capital to be able to generate enough returns to meet future payouts.