In 2009, the payouts on the 3% growth fund dropped by about 17% to 18%, according to Vanguard. And the 2010 payments will fall again by almost 10%, even though the underlying assets are growing. The 3% growth focused fund, for example, estimates a $240 monthly payout for an investment of $100,000 in 2010, while its 5% growth and distribution fund pays $407 a month and its 7% distribution focused fund pays out $583.

And much of the payouts have continued to eat into principal. In 2008, 100% of the funds' payout was coming straight back from investor capital. In 2009, those amounts fell, but not entirely: The distribution focused fund continued to return nearly 40% of principal to investors while the growth and distribution fund returned a bit over 21%. Only the 3% growth fund returned no capital in 2009.

"If you invested in March of 2009," says Culloton, "you would have thought, 'Excellent! I got in at the bottom and the market has done nothing but go up since then. My personal payment should increase when they recalculate this thing in January of 2010.' Well that didn't happen. People who invested in March 2009, they all declined because the formulas that calculate the payments are based upon trailing multiyear performance, so they're not based upon Dan Culloton's net asset value since March 2009, they're based on the funds' historical net asset value."

Charles Schwab's Monthly Income Funds have a similar method as Vanguard's, offering 3% to 6% payouts in its funds based on historic yield environments over a ten-year period.

Fidelity's strategy, meanwhile, is different, as it uses funds with different target dates, investing more aggressively for longer dated funds using a glide path similar to that of a target date fund and gradually ramping up the payouts each year under its optional Smart Payment Program until the fund is totally exhausted.

The Fidelity Income Replacement Funds invest with a target date up to 35 years out, gradually ramping up the payouts until the fund is used up. The payouts are reset annually based on last year's NAV. The annual target payouts rise so that they might be 5% of NAV at the beginning, divided by 12 monthly payments, and then rise to, say, 6.5% or so 20 years out, divided by 12 payments. For the last year, finally, the fund will pay out 100% of what's left over divided by 12. The funds reset at the end of each year according to what the market has done, and naturally, they paid out less in 2009 after the carnage in 2008.

Dan Beckman, a vice president of investment product management and development at Fidelity, says that clients don't mind eating into principal because the whole idea is for the fund to exhaust itself.

Fidelity says that in '08 and '09, payments were made up of about 35% from dividends and about 65% from the automatic selling of shares. The company says that its funds, unlike some others, return principal through the automatic selling of shares, which is clearly seen by the shareholder whereas the return of capital through a distribution may not be as evident.

"I think maybe what's different from our product design from some of the other funds that may have come out shortly after ours is that our product by design is meant to return the investors' investment to them over that defined time horizon," says Beckman, "so ours is working exactly as intended on that dimension. But the proposition is, you put your money in, we manage it from an asset allocation perspective, as well as a withdrawal perspective, to make sure that these payments last over that time horizon."

The mutual funds calculate these income streams to dampen volatility so that the investor can rest easy and not suffer the slings and arrows of a volatile market.