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How Fidelity Manages Income Replacement FundsSM

Most mutual funds are designed to help you prepare for retirement, with the goal being to set aside money each month in order to build up your savings. Fidelity Income Replacement FundsSM are very different. Instead of saving for retirement, these funds are managed to help you live in retirement. Instead of putting money away each month, you take money out. And instead of trying to build your savings up, the goal is to take your account down to $0.

If you’re like most people, when it’s time to retire you will not have saved enough money to live entirely off the interest and dividend income generated by your savings. That means you’ll have to withdraw a portion of your total savings each month in order to have enough money to cover your living expenses. For many investors, calculating the right withdrawal amount can be difficult. Withdraw too much each month and you run the risk of your savings running out. Withdraw too little and you may not have enough to cover your expenses. Then there’s the question of how you invest the remaining money in your account.

The goal of Fidelity Income Replacement Funds is to eliminate all those questions. You dedicate a portion of your savings to a fund, then choose either a monthly withdrawal amount or a set number of years that you’d like to receive regular withdrawals and an initial amount to invest.

Bridge income
You can use a Fidelity Income Replacement Fund as a bridge to cover expenses until other income sources become available or until you become eligible to take qualified withdrawals from a 401(k). You can also use a Fidelity Income Replacement Fund to postpone receiving Social Security or pension payments. This may allow future Social Security or pension payments to grow larger.

Extra income for early retirement
Many people use their first years of retirement to do things they’ve always wanted to do, like travel. A Fidelity Income Replacement Fund can help turn a portion of your income into monthly payments that can be used for a wide range of lifetime pursuits.

Supplemental long-term income
Use a Fidelity Income Replacement Fund to generate a long-term stream of income to cover retirement expenses. For as long as you own your fund, you maintain total control of your assets.

Fidelity Income Replacement Funds are designed to provide a stream of income over a set number of years, but it’s important to understand how the money that is not paid out is invested. Many investors struggle with the right way to re-allocate their portfolios as their needs change from growth to income generation. Fidelity's professional asset allocation process takes the guesswork out of creating a diversified investing and withdrawal strategy, providing a balance between the need to generate income and the growth of the assets that remain in your account.

Fund managers allocate assets in a mix of equity, fixed income, and short-term mutual funds, all of which are managed by Fidelity. Like any time-sensitive investment, these funds invest more aggressively—with a larger concentration of the assets in stocks—when the horizon date is many years away, but automatically become more conservative over time as that date approaches.

All fees for Fidelity Income Replacement Funds are based on the fees of the underlying funds.

Fidelity Income Replacement Funds are designed to work with the Smart Payment Program®, which was created to turn some of your retirement savings into regular monthly payments.

At the beginning of each year the payment rate increases based on a predetermined schedule, and is designed so that your monthly payments, while not guaranteed, seek to keep pace with inflation. If the market performs strongly in any given year, your payments may increase the following year; poor market performance could lead to lower payments.

Your monthly payments come from two sources:

  • Dividends and capital gains generated by the investments in the underlying Fidelity funds
  • Any portion of your principal needed to make up the remainder of the payment amount

When the fund reaches its target year, all of your remaining principal, including any investment gains, will be returned to you, and the fund will be closed.

It’s important to note that one of the biggest risks in retirement is the risk presented by inflation, which could erode your purchasing power. To help control this risk, a portion of the portfolio remains invested in growth-oriented assets, such as stocks. This strategy is designed so that monthly payments have the potential to keep pace with inflation, though this is not guaranteed.

As an investor in a Fidelity Income Replacement Fund, you’re free to buy and sell your fund at any point if your needs or plans change, with no fees or penalties. You can also increase or decrease the amount you invest, and select different funds by horizon date. Most importantly, you’ll always have the option of selling the funds you own as part of the program at any time and keeping the remaining proceeds.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information.  Read it carefully.

Each income replacement fund's investment objective is intended to support a payment strategy through the Smart Payment Program (“SPP”).  Monthly payments may not keep pace with inflation, will fluctuate year over year and will result in the gradual liquidation of an investment in the fund by its horizon date. As with any mutual fund, withdrawals will reduce the investment balance and future returns are not earned on amounts withdrawn. The funds and SPP may not be appropriate for all investors.  Please consult the fund's prospectus for more details

Performance of the Fidelity Income Replacement Funds depends on that of their underlying Fidelity funds. These funds are subject to the volatility of the financial markets in the U.S. and abroad and may be subject to the additional risks associated with investing in high yield, small cap and foreign securities.

Please note, the Fidelity Income Replacement Funds and the Smart Payment Program may not be appropriate for all investors. Investors who own a Fidelity Income Replacement Fund within a tax-advantaged retirement account and who elect to participate in the Smart Payment Program should consult with their tax advisers to discuss tax consequences that could result if payments are distributed from their core account prior to age 59 ½ or they plan to use the Smart Payment Program, in whole or in part, to meet their annual minimum required distribution.  You should consult a financial adviser or Fidelity representative to determine whether a Fidelity Income Replacement Fund is right for you.

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