"Target distribution funds," also known as "managed payout funds," are a new type of mutual fund designed especially to appeal to the more than 77 million baby boomers who will be retiring over the next two decades. They are modeled after the popular target date mutual funds, used in many 401(k) plans, that have a future date in their name (e.g., XYZ Company 2040 fund). Target date funds become more conservative (i.e., less stock in the fund portfolio) as they approach the target date. The fund portfolio generally consists of a mix of stocks, bonds, and cash assets.
In the case of target distribution funds, however, the emphasis is on cash distributions or "decumulation," and the funds seek to provide a steady, but not guaranteed, annual distribution. Investors arrange to make regular withdrawals (for example, a payment every month) to create a "retirement paycheck." The amount of the payment is generally tied to fund performance so account values, and hence withdrawal payments, rise and fall with market returns. Unlike annuities, distributions from target distribution funds are not guaranteed for an investor's lifetime. Rather, payments will last only as long as funds remain in the mutual fund account. If there is a prolonged market downturn, the value of fund shares will be reduced, which can shorten the time that withdrawals will be available.
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