NEW YORK — Investors who reach retirement face the difficult task of estimating how long they will live — and how long their nest eggs should last.

A new type of mutual fund introduced by Boston-based Fidelity Investments and Vanguard Group of Valley Forge, Pa., seeks to make that task easier. The funds try to maintain a payout that can be sustained for many years.

Perforce, the new funds must make a tradeoff between expense and payout, one that poses risks and rewards for investors.

With millions of Baby Boomers set to retire, mutual fund companies, insurance companies and financial advisors are battling over retirement savings, estimated at $16.4 trillion at the end of 2006. Fidelity last week launched 11 Income Replacement funds and the Vanguard plans to launch three Managed Payout funds, each of which are meant to help retirees receive a regular payment while they remain invested.

Traditionally, the role of maintaining a steady income has been taken by fixed annuities. The new funds don’t have the higher expenses of annuities — but also, significantly, offer no guarantee that investors won’t outlive their assets, the heart of an annuity.

“In general, the fact that they’re launching these products is great,” said Brad Levin, a certified financial planner and president and founder of Legacy Wealth Partners in Encino, Calif. “Retirees are just not prepared for what they’re going to be facing as they go into retirement.” But he worries that investors in the funds “could make mistakes that cause them to run out of money.”

An insurance industry executive, who wished to remain anonymous — and whose industry competes with fund companies — said mutual fund companies should be applauded for trying to address sustained retirement income, but “without the presence of a guarantee” as in an annuity, “I don’t think they’ve gone far enough.”

Fidelity and others say the new funds weren’t meant to be annuity clones.

“This is just another arrow in the quiver for investors to use,” said Boyce Greer, president of fixed income and asset allocation at Fidelity Investments. “We wanted to provide an income vehicle that had very different characteristics than an annuity.”

Fidelity’s Income Replacement Funds are a series of 11 funds of funds combining an asset allocation strategy with an optional monthly payment program, which is offered at no cost. The funds carry “horizon dates” from 2016 to 2036, meaning the income stream from the funds are expected to end on those dates. The funds begin with a more aggressive asset allocation weighted toward equity funds and gradually shift to a more conservative allocation emphasizing fixed-income and short-term income funds.

Each of Vanguard’s Managed Payout funds is a fund of funds that will invest primarily in other Vanguard funds, including domestic and international stock index funds, bond and REIT index funds and inflation-protected securities and money-market instruments. The funds will also invest in commodity-linked investments and market-neutral or other “absolute-return” strategies, and are expected to sustain annual distribution rates from 3% to 7%.

The Vanguard Managed Payout Capital Preservation Fund offers an annual distribution rate of 7%, but no guarantee that the fund won’t eat into principle to make that distribution.

Dan Culloton, a senior analyst at Chicago investment-research firm Morningstar Inc. who covers Vanguard, said that while the funds don’t offer annuity-like guarantees, they offer more control over capital, he said.

Ellen Rinaldi, a principal in Vanguard Group’s investment counseling and research group, said, “many people are heading into retirement without any structure and withdrawing without any idea” what makes a sustainable income stream.

Greer of Fidelity said that if the funds came with a guarantee, they would not be able to offer the heightened liquidity — as mutual funds, they can be sold at net asset value and have no lock-up period — or low cost they currently offer.

Product Evolution Expected

Levin, the financial planner, said the new funds require that investors choose the appropriate income stream, but it’s not uncommon for investors to underestimate their lifespans. It’s generally understood that a 4% or 5% retirement account withdrawal rate is sustainable, he said, but an unsophisticated investor would likely choose an option offering 7%. “But can they really deliver that kind of payout over the long term?” Moreover, he said market volatility also puts a premium on advice to investors making these types of decisions.

Greer said Fidelity tells investors to be conservative and plan on living into the top quartile of life expectancies — age 92 for a man and 94 for a woman — and that the firm’s online tools prompt investors to do so.

Fidelity views the funds as building blocks, not necessarily as a place for an entire nest egg, and envisions several uses for the funds, Greer said. For example, an investor who wants to retire early or who wants income before he retires could time the Income Replacement stream to end when his defined-benefit plan or Social Security payments kick in, Greer said. Or because many retirees spend more in the first few years of retirement, they could use the payment stream for discretionary expenses, such as travel or sports club memberships, during that period, he said.

“My guess is that we’re going to find that they will be used in situations that we never foresaw,” said Greer.

As for the importance of an advisor, Culloton said, you could say the same for selecting mutual funds. Rinaldi of Vanguard said that while seeing an advisor is a great thing to do, there should be solutions for those who choose not to. “That’s one of the things we’re doing here.”

Morningstar’s Culloton said that these income distribution mutual funds are intriguing, yet imperfect options, that will evolve. “The whole idea is kind of a sea change in how people are thinking about their investments,” he said, with a shift from a focus solely on accumulation to a focus on whether or not investors are in a portfolio that will meet their retirement needs. “Financial institutions like Fidelity and Vanguard are going to figure out how this works, where it can be improved upon and how they can do that.”

Greer said Fidelity will take lessons from the market and apply them. “New products will be striking the balance between guarantees for life, liquidity and flexibility and cost,” he said.

Stocks outside of the U.S. are widely seen as strong long-term growers, but one group of popular mutual funds may be keeping investors too close to home.

Target-date funds are one-stop shops for 401(k) and other retirement-oriented investors, but these diversified offerings have been chastised for being too light on stocks, given their customers’ multidecade horizons. Fund companies have increased the stock position of these funds — including the international portion — but some investors still explore less of the globe than others.

Vanguard Group’s target-date funds, for example, keep 20% of their stock allocation outside of the U.S. Meanwhile, Fidelity Investments and T. Rowe Price Group (TROW) stay closer to 25%. Other firms ratchet exposure higher: Putnam Investments, for instance, is around 30% and AllianceBernstein tips the scale above 35%.

Target-date funds could be more intrepid, says Greg Carlson, a fund analyst at investment researcher Morningstar Inc. “For a longer-term perspective such as most of these funds are taking,” he said, “certainly one could justify a larger allocation to international.”

Indeed, around half of the world’s total stock-market value is outside of the U.S., but putting 50% of a portfolio abroad would stretch the comfort level of even seasoned investors. Yet studies show that allocating at least 20% of your stock investments in non-U.S. markets boosts returns and lowers overall risk.

Golden Globe

“There’s no question that there’s a significant diversification benefit to international investing,” said John Ameriks, a principal in Vanguard’s investment counseling and research group. “As a baseline, we think 20% gets you the largest part of that benefit.”

If 20% in non-U.S. stocks is good, some researchers say more is better. “If you are a long-term investor, we suggest that about 30% of your equity allocation be in international equity,” said Michele Gambera, chief economist at data firm Ibbotson Associates, a unit of Morningstar.

“The first 20% is more powerful than the next 20%,” Ameriks counters. “How far do you go? It’s a question of costs versus benefits. Our fundamental view is that over long periods of time you don’t expect to see large differences in returns between the domestic and international economies.”

Target-date funds aren’t market-timers, but international investing has been hugely profitable lately, especially with the feeble U.S. dollar enhancing results for Americans. Global markets outside of the U.S. returned 23% annualized in dollar terms over three years through September, and emerging markets returned 37%, according to index tracker MSCI. U.S.-based companies in the Standard & Poor’s 500 Index, meanwhile, gained 13%.

“These international markets draw attention and people start chasing them,” said Barry Taylor, a San Francisco-based financial advisor. “A high percentage of calls I get are about foreign stocks.”

Most of Taylor’s clients have 20% of their stock investments overseas, he said, but more experienced investors who “can stand the risk” are positioned closer to 30%. “The volatility of foreign markets is certainly greater than for U.S. markets,” he noted.

So while owning international stocks is important, planting portfolios more firmly on U.S. soil may not be a bad idea right now. S&P’s investment policy committee last month reduced the international weighting in its model stock portfolios to 20% from 25%. The decision reflects a negative view on Japan and trimmed exposure to developed markets, but is still five points above the portfolio’s benchmark, according to S&P international equity strategist Alec Young.

“We still like Europe and we really like emerging markets,” Young said. “But with the euro so strong, there’s a risk that growth will slow in Europe.”

Indeed, much of the gains from overseas markets lately have come from an exchange rate that brings U.S. investors more dollars when profits are repatriated. Moreover, large-cap U.S. stock funds are benefiting from global business trends. The big S&P 500 companies those funds typically own, for example, earn almost half of their revenues abroad.

“A lot of our U.S. mutual funds are finding opportunities overseas,” said Jonathan Shelon, co-manager with Ren Cheng of Fidelity’s target-date funds. “It’s much more difficult today to compare a U.S.-based company without considering its non-U.S. competitor.” Fidelity’s international-fund managers are also taking greater interest in emerging markets, he adds.

Untied Nations

Given such divergent opinions, it isn’t surprising that target-date funds’ international makeup also varies.

Vanguard’s funds, with a relatively low allocation to international stocks, ironically maintain a noticeable footprint in riskier developing regions. About 3% of the longer-dated portfolios are invested in its Emerging Markets Index Fund (VEIEX) and around 5% in Pacific Stock Index Fund (VPACX). Another 8%-10% is given to European Stock Index Fund (VEURX).

Fidelity’s offerings include five international products: about 4%-5% each in Europe Fund (FIEUX); Overseas Fund (FOSFX) and Diversified International Fund (FDIVX), with a smattering in Japan Fund (FJPNX) and Southeast Asia Fund (FSEAX).

At T. Rowe Price, target-date investors get non-U.S. exposure through the firm’s Overseas Stock Fund (TROSX), International Stock Fund (PRITX), and International Growth & Income Fund (TRIGX). Emerging markets exposure is being added to the target-date funds, says portfolio manager Jerome Clark. “We will do it slowly,” he said, “probably over at least a year. The current environment is a bit rich for emerging markets stocks