From paycheck to Managed Payout Fund

[Xman]

I'm looking at getting set up for the transition from a paycheck to living off of investment income. I came across Vanguards managed payout funds, and they seem to be a great tool for me to use for disbursements from savings to the "house account". I did a search on the sight to see what has been discussed previously, but the threads I found were all a bit aged, especially given the market of the last 2 years.

Is anybody using these funds? $2.3 million in the middle fund is projected by Vanguard to give me $10k/year, rising with inflation. It seems like Vanguard just changed the calculation; a couple days ago I did it and it only took $2 million to get the needed $10k. Even using the current numbers, it seems that Vanguard is projecting a real return of a little over 5%.

I don't like annuities for various reasons, but these funds seem to offer similar advantages (although without a guarantee). Am I lulling myself into accepting a too-high withdrawl rate because it is packaged by Vanguard? Are there other risks with this approach?

Thanks in advance for any insight.

[MasterBlaster]

I like these funds. You get professional management of your stash for a relatively low management fee. The payout feature seems a bit gimmicky to me though. If I were to use these funds I would vary my withdrawals based on a fixed percentage of the balance (say 5%). That would work better in a down market.

These funds were launched at the worst possible time though. they haven't really caught on. As of last November they (VPGDX - the middle fund) only had 171 million in assets which is tiny compared to other funds. If you were to put in your $2.3M then you personally would hold over 1% of their assets.

The one thing that I would be concerned about is them (possibly) holding collateralized debt obligations (and equivalent) that have not been marked to market. I would do some more reaserch before I put much into them. If that's the case then you just may be buying less than you think.

For fun check out the Fidelity offerings. They offer a different twist on the decumulation game.

[clifp]

One of the more respected (former) posters was a fan of the managed funds. I have been tempted many times to invest in them. I hope they increase in popularity cause I think they are a good investment option for retirees.

BTW, 2.3 million will give you $10K a month (not year) income. The Vanguard website says that 2010 payout will be reset and will likely be lower, so you might want to hold off until that is calculated.

[Xman]

MasterBlaster - Although the payout feature is really a simple thing, I like the idea of a steady (smoothed) payment to going the account each month. It probably makes me feel safer than I should - if markets all tank together like they did recently, this predictability will have been an illusion. It seems like such a convenient approach to handle withdrawls, cover a wide selection of asset classes and rebalance that I wonder why there aren't more assets. That's startling that I'd account for over 1% of the fund. I'll check Fidelity's selection to educate myself - although I've stuck with Vanguard up to now, figuring that their ownership structure has to result in better economics than Fidelity. Thanks for the feedback.

clifp-you are of course correct on the $10k/mo. Regarding the lower reset, I THINK they just did that and my estimate reflects the current projected payout but I will certainly check. I won't be making the move for a few months in either case. Thanks for the input.

[Xman]

Vanguard seems to have changed the formula for managed payouts. The Vanguard calculator now requires $2.6 million to generate montly distributions from the Managed Payout Fund (the middle option that keeps up with inflation) of $10k, for a withdrawl rate of 4.6%. Interesting that the implied SWR is getting closer to 4%.

[easysurfer]

This thread has got me interested in learning more about these type of funds. From what I've read, mutual fund companies such as Fidelity and Vanguard were seeing many of there customers turn to insurance companies for annuities when they retired so they created these funds to offer an alternative.

As MasterBlaster pointed, these were launched at the worst time.

Vanguard Payout Funds Dip into Capital - Morningstar Advisor

Mutual Funds Pitch Alternative to Annuities - WSJ.com

http://www.forbes.com/2007/10/24/ret...money_inl.html

[easysurfer]

Looks like the Growth and Distribution Payout fund is currently in a 52 week high:

Denver Post: Stocks

[Xman]

Thanks for the links. I'm not seeing any red flags, and am leaning towards using Vanguard's fund to provide income after I pull the plug. It's funny(?) that in the WSJ article, they talk about "relatively low fees, ranging from .5 to 1.9%..." Only in an article talking about annuities would 1.9% be called "relatively low".

While I'd love the insurance company guarantee against the doomsday scenario for returns, I won't pay for it. I don't know how to calculate it, but I guess the difference in expected returns for the managed payout funds vs. an annuity would be the difference in fees. The Forbes article talked of typical annuity fees of 3%. So I guess that means that the managed payout fund will return around 2.5% more per year than the insurance product. That's alot.

[easysurfer]

Xman, You're welcome. I really like the idea of using them to provide some additional income. Maybe decide what percentage of investments to have in them. I go back and forth though as to which of the payout funds to go with (the Growth Focused vs Growth and Distribution) Of course initally the Growth pays less, but if things work out as expected, in time as the balance grows, one would expect that to payout more.

[easysurfer]

Well, I took the bait and opened up an account (Growth and Distribution). Wish me luck.

The beauty of it is that since this is not an immediate annuity, if I get cold feet later on, I can sell my holdings since it as this is just a mutual fund.

[sirion]

Good luck!! Keep us posted as this is something I'm thinking about for the future.

[Tiga]

I was waiting for these funds to appear, but soon after they did, everything tanked and I didn't jump in. So, I'm looking at them again. I think in concept the Vanguard ones are great. But I'm dismayed at the small amount of money (customer base) that they've accumulated. I'm also surprised by the very rigid formula that Vanguard displays in the prospectus for determining the payout percentage for the next calendar year. I would have thought they would have needed something more flexible to ensure long term survival. Perhaps there's some wiggle room in the fine print. I prefer the Vanguard approach, but there are others, according to this article, (which may soon disappear at the now defunct website). Don't agree with their turkey reference though, you'd expect these funds payouts to go down at times like these... So far, managed-payout funds more turkey than turnkey - Financial Week

[easysurfer]

I jumped in early in the year.

So far, I decided to reinvest and not use the payout option until starting next year. The reason for my decision is because I started with the mininum balance and am DCAing into the fund the rest of the year.

Another consideration is that since they invest in a fund of funds, depending on how much you put in can skew your asset allocation. I do all my AA calculations with a spreadsheet, so I put in a fudge factor for this fund on my calculation to make sure I'm within my target allocations.

I'll see how I feel about them in a year or two. The good thing about them is since they are treated as just another fund, I'm not locked in. That is, if things don't pan out, I can sell like I would a regular fund.

[charlie]

I think these are good funds IF they fit your asset allocation AND you fully understand that they have the same risk that any equity heavy funds would have. They are not guaranteed and will tank when the market tanks.

That said, I think they are better diversified than any other Vanguard balanced funds and they hold a higher percentage of foreign stocks, which I like. No other Vanguard fund holds the REIT index fund and none other invests in commodities to my knowledge ..... that may or may not be good according to your view point.

The payout is the average of the ending NAV of the past 3 years. This smooths the payout as was noted above and is a safer way of taking distributions than the "4% of initial port adjusted for inflation" approach.

Cheers,

charlie


I owned the 5% payout fund until early this year when my financial circumstances changed and my need for risk was reduced.