Fund Mechanics: Investing & Redeeming

Step 2: How Do I Withdraw Money From My Fund?

A variety of useful approaches are also available when you need to withdraw money from your mutual fund.

Mailing in a redemption letter is the old-fashioned way to withdraw money from a fund account. The letter must contain the necessary information—including name(s) of registered owner(s), fund name, account number and redemption amount—and be properly signed by the account owner(s). You may need a signature guarantee for your request to be processed.

There are several faster, simpler ways to redeem shares. Be sure to sign up for these additional services, if necessary.

• Requesting a check by phone. You may telephone your shareholder representative and request that a check be mailed to you or your bank. Of course, you lose interest during the mail transit time, an important consideration with larger redemptions.
• Drawing a check on a fixed-income fund. You can write a check on a money market or other fixed-income fund, perhaps on money just transferred in from another portfolio in the family. Funds generally place a minimum, commonly $100 or $500, on individual checks. If you draw your check on a fund with a fluctuating share price, it would give rise to a taxable event. Money market funds ordinarily maintain a stable $1 price, so you need not be concerned about taxable events when drawing checks on these funds.
• Wiring money from your fund. You can request your company to wire the proceeds to your bank account. This is the quickest way to make a direct transfer of money, and it is recommended for large sums. Your bank and fund will tell you about their fee policies.
• Making an ACH redemption. If you have established an Automated Clearing House linkage between your fund and bank, you can simply phone your company and request that the balance be transferred to your bank. However, it could take a few days for the money to reach your account.
• Many fund families allow you to request an electronic bank transfer and make an exchange with another fund on-line. Shareholders are normally subject to the same time-of-day limits imposed on telephone orders.

Systematic Withdrawal Plans

Systematic withdrawal plans are useful for retirees and others who want to receive regular monthly or quarterly checks. The payments could be sent to someone besides the account holder, such as a student in college or another dependent. A certain minimum account balance, such as $10,000, is required to establish the program. You can change your withdrawals or discontinue them at will. Most funds offer systematic withdrawal programs.

Three key variables you need to come to grips with in establishing a withdrawal plan are:

• Your fund's expected total return;
• The expected rate of inflation; and
• Your target withdrawal percentage.

For people who may be withdrawing money over a decade or longer, a conservative stock fund can lead to the best results. Stocks have generated significantly higher long-run total returns than bonds. In fact, it may be unwise to use a withdrawal plan with a fixed-income fund if you plan on making redemptions over an extended period. For longer-term bond fund investors it's better to only take the monthly dividend checks and not disturb the corpus, since doing so can significantly deplete your capital.

For example, an income-oriented stock fund is a good withdrawal plan candidate. Because your investment in an income-oriented stock fund may not yield sufficient dividends to meet your needs, you may need to dip into principal. But your capital can still grow if your withdrawal rate is not excessive.

The best way to plan your future withdrawal stream is to make some projections. You can get a good estimate of how long your capital will last under different assumptions using annual redemptions, even though you may want to redeem more frequently. The percentage of your initial capital withdrawn annually must be realistic; you don't want to deplete your nest egg too soon.

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