Fidelity Income Replacement FundsSM FAQs
Can I buy a Fidelity Income Replacement FundSM without signing up for the Smart Payment Program®?
Yes, while the funds are designed to work in conjunction with the Smart Payment Program®, you can purchase the funds without signing up for the program. If the Smart Payment Program® is not adopted, you will not receive monthly payments, but will still receive monthly dividend distributions that you can choose to reinvest or receive as payments, just as you would with any other mutual fund.
How will not taking monthly payments affect my investment?
If you choose not to participate in the Smart Payment Program®, or you choose to suspend payments for any reason, you will remain fully invested unless you decide to redeem shares. You can sign up for or reactivate the Smart Payment Program at any time. At that point, Fidelity will calculate your remaining monthly payments for that calendar year.
What is the strategy behind the withdrawal process?
The withdrawal process is a disciplined approach that balances your need for retirement income with your need to remain invested for growth in order to keep up with inflation. Based on its quantitative analysis of historical market returns and certain other factors, the funds' adviser, Strategic Advisers, Inc., a registered investment adviser and a Fidelity Investments company, has determined a schedule of annual target payment rates. These rates are designed, but not guaranteed, to enable aggregate monthly payments from a Fidelity Income Replacement Fund to keep pace with inflation over its time horizon. The annual target payment rates are scheduled to increase as a fund approaches its horizon date.
Why is it smart to invest in something that is designed to have a declining balance over time? Aren't you supposed to invest for growth?
It's important to remember that Fidelity Income Replacement FundsSM were designed especially for use in retirement. During retirement, most investors have to tap into their investments to pay for living expenses. A common strategy is to employ a systematic withdrawal plan in which you sell a set percentage of assets in your portfolio each year. But once your portfolio is allocated, you still must determine the appropriate level of withdrawals and in some cases, which investments to sell. Fidelity Income Replacement Funds are designed to work in conjunction with an optional systematic withdrawal plan, the Smart Payment Program®, which sets the appropriate withdrawal rate based on the fund's time horizon. Payments under the Smart Payment Program may consist of both investment income and the necessary return of principal through the sale of shares to meet the monthly payments. Fidelity's professional fund managers decide which underlying investments to sell, and when to sell them, while the remaining assets in the fund are still invested in a manner intended to support aggregate monthly payments that keep pace with inflation over a fund's time horizon.
Are these annuities?
No, Fidelity Income Replacement FundsSM are mutual funds with all the flexibility and liquidity offered by mutual funds. Annuities are ultimately backed by an insurance company and are structured differently from mutual funds from a legal, tax, and expense perspective. With annuities, you may have to give up control of your principal or pay additional fees in exchange for any guarantees. Fidelity Income Replacement Funds, though not guaranteed, ensure you always have complete access to the current value of your investment (through the ability to redeem your shares) as you would with any mutual fund.
How can I find the payment rate I will receive?
At the beginning of each year, each fund's annual target monthly payment rate is calculated based on a schedule of increasing annual target rates, as shown in the prospectus. This schedule may change in the future. Customers will be notified in January of each year of the amount of their monthly payments, based on the target rate and the amount they've invested in the fund. To view the schedule of payment rates, please see the prospectus.
Will my monthly payments increase each year?
While payment rates are scheduled to increase each year as shown in the prospectus, there is no guarantee that the actual dollar amounts will increase. The monthly payments are designed to be implemented through your optional participation in the Smart Payment Program®, which pays dividends earned on your capital and, when necessary, pays back a portion of your own capital through the sale of shares. In doing so, the principal remaining in the fund may decrease each month as necessary, so that when the new increased rate is applied at the beginning of the next year, it is applied against a potentially smaller level of principal, assuming no market return. However, while you are receiving your monthly payments, your remaining principal is invested in a diversified portfolio. If your investments perform well in a given year, your monthly payments may increase in the next calendar year. But if your investments perform poorly, your monthly payments would likely decrease in the following calendar year.
What are the potential tax implications?
As with any investment, your investment in a fund could have tax consequences for you. If you are not investing through a tax-advantaged retirement account, you should consider these potential tax consequences. Distributions you receive from each fund are subject to federal income taxes, and may also be subject to state or local taxes. For federal tax purposes, certain types of distributions, including dividends and distributions of short-term capital gains, are taxable as ordinary income, while other types of distributions, including distributions of long-term capital gains, are generally taxed at the long-term capital gains rate. A percentage of certain distributions of dividends may qualify for taxation at long-term capital gains rates (provided certain holding period requirements are met).
Your redemptions, including automatic sales of shares through the Smart Payment Program and exchanges, may result in a capital gain or loss for federal tax purposes. A capital gain or loss on your investment in a fund generally is the difference between the cost of your shares and the price you receive when you sell them. Shareholders who elect to participate in the Smart Payment Program should consult their tax advisor to discuss additional tax consequences that could result from participation in the Smart Payment Program.
If you are investing through a tax-advantaged retirement account, you should consider these potential tax consequences. Earnings and pretax (deductible) contributions from certain retirement accounts, such as a 401(k) or Traditional IRA, are subject to taxes when withdrawn. Earnings and after-tax (non-deductible) contributions distributed from Roth IRAs are income-tax-free, provided certain requirements are met. Distributions before age 59½ may also be subject to a 10% penalty. Monthly payments from tax-advantaged accounts are moved to your core position.
How broadly diversified are the Fidelity Income Replacement Funds?
Fidelity Income Replacement Funds currently invest in a total of 15 underlying Fidelity funds, including domestic and international equity funds, investment grade and high yield fixed income funds, and short-term funds. The mix of investments depends on the horizon date of the fund; funds with longer time horizons will have a higher percentage invested in equity funds, aiming for longer-term growth. As the funds near their time horizons, the allocation to fixed income funds will increase in order to help protect the gains already achieved.
How do the expense ratios compare to similar funds, like Fidelity Freedom® Funds?
Just like Fidelity Freedom® Funds, Fidelity Income Replacement Funds expense ratios are calculated based on the underlying fund investments, currently ranging from 0.54% to 0.67%. There are no additional management fees associated with the funds.
How much could my payments fluctuate from year to year?
Monthly payments are dependent upon the performance of the fund in which you are invested and the Smart Payment Program rate that corresponds with that fund—the more volatile the markets, the more the payments will have the potential to fluctuate both up and down.
It is impossible to predict how markets will perform in the future, and there's no guarantee that markets will always go up in any given year. We've designed the Smart Payment Program with that in mind. This does not mean that your payments will increase every year, as a down market could result in decreased payments in the next year. However, it does mean that over time, payments are designed to increase, though this is not guaranteed.
To illustrate how the Smart Payment Program monthly payment could vary, let's use a hypothetical example to demonstrate the impact on payments of a 10% increase or 10% decrease in market value. An investment of $100,000 into a fund with 20 years left until its stated horizon date would provide monthly payments of $543 in the first year. If the fund has a 10% return, the monthly payments in the second year would be $583, whereas if the fund loses 10%, the monthly payments would be $474. These payments do not include the effect of taxes.*