Turning savings into income

(Fortune) -- Where baby-boomers go, the financial services industry follows. Too large, at 77 million people, and too affluent to be ignored, this group has been heavily wooed at every stage of life. Now, as the oldest boomers begin leaving the workforce, Fidelity and Vanguard have launched mutual funds aimed at retirees who are making the transition from saving to spending.

After retirees give up the security of a regular paycheck, they have to figure out how much of their savings they can spend while making sure they have enough money to last a lifetime (however long that turns out to be). Fidelity and Vanguard have taken different approaches to addressing that problem.

Fidelity is offering 14 of what it calls Income Replacement funds. Unlike most mutual funds, they are designed to liquidate at specific dates: every two years from 2016 to 2042. The idea is for your money, plus investment gains, to be returned to you in monthly installments over the life of the fund. The portfolios invest in 15 other Fidelity funds, including 100 Index, International Discovery, and Total Bond. Early on, the funds will be managed for growth with a greater emphasis on stocks. The asset allocation will become more conservative as the fund nears its end date.

While the prospect of monthly income is appealing, you can't be sure how big those payments will be. The dollar amount will be set each year, based on a target rate and the fund's performance during the previous 12 months. If the fund has notched big investment gains, the payment may be larger. If it has a bad year, the payment may be smaller.

Vanguard is taking a different tack with its Managed Payout funds, launched last month, which are modeled on university endowments. Like endowments, these funds aim to leave the principal intact; they have no end dates and look to broader asset allocation to boost returns. Investors can choose from three portfolios: Growth Focus seeks to increase investors' principal while providing a modest payout; Distribution aims to preserve principal while maximizing the payout; and Growth and Distribution will try to strike a balance between the two.

The investment committee that will make asset allocation decisions for the funds will be led by Gus Sauter, Vanguard's chief investment officer. Vanguard has said that these funds-of-funds may put money into commodity futures, the company's Market Neutral fund, and even hedge funds. Look for details on the holdings when they're posted on the Vanguard website later this month.

So are any of these funds right for you? We have some reservations. For one thing, they're new and untested: There's no telling how they'll fare under real-world conditions. For another, they can be hard to understand.

But our chief qualm is that because these funds tout monthly payments, some investors may confuse them with annuities - insurance products that offer guaranteed income. These are investments, and they offer no guarantees. While the withdrawal rates and asset allocation decisions are based on careful research and rigorous calculations, the payments ultimately depend on management and market conditions - and could turn out to be very different from initial projections. Payments will vary from year to year, and as with any investments, you could end up losing money.

"Fidelity and Vanguard are the finest companies I know," says noted financial planner Harold Evensky. "But I'm concerned about these products because I think there's too much risk that investors will believe the payments are fixed or guaranteed." Other financial planners share those reservations.

On the plus side, unlike annuities, these funds let you keep your money. After the $25,000 initial investment, you can buy additional shares or sell them without penalty, a big advantage if you need to pay for an unexpected expense. Just remember: The income they offer is a goal, not a promise.

For more Right on Your Money go to cnn.com/rightonyourmoney.