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New Income/retiremnt funds by Fido and Vguard
Old 10-21-2007, 05:10 AM   #1
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New Income/retiremnt funds by Fido and Vguard

http://personal.fidelity.com/myfidel...t_a_glance.pdf

Fidelity seeks to provide cash for retirees with new investment options - Financial Week

A Look at Fidelity’s Income Replacement Funds and Vanguard’s Managed Payout Funds—� AllFinancialMatters
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Old 10-21-2007, 07:49 AM   #2
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I looked at Fidelity's links, and I don't get it.

The examples they show are for returns from a balanced portfolio of S&P 500 and a Total Bond fund, starting around 50/50 and ending up bond-heavy at 20 years. The monthly income they show begins at a 6.5% withdrawal in year 1, and increasing with inflation, which means they're projecting the average returns of both the S&P and bonds. That looks great on paper, but that withdrawal rate doesn't have a good probability of long term success given market variability.

But even with average projections, I don't understand how they can claim this to be an "income replacement" fund. Income funds need to have low variability and fairly predictable returns. If they can show me how they can pay out 6.5% year in and year out with low variability, I'll consider it.
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Old 10-21-2007, 08:00 AM   #3
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What is does project is you have received your money back
in 10 years of payments and will get what ever the fund can pay
beyond that, maybe 10 more years if all goes as planned.
Takes the thinking out of it and 7% is not that bad at all for a income fund. Definetly aimed at the boomers retiring.
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Old 10-22-2007, 05:49 AM   #4
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What is does project is you have received your money back
in 10 years of payments and will get what ever the fund can pay
beyond that, maybe 10 more years if all goes as planned.
Takes the thinking out of it and 7% is not that bad at all for a income fund. Definetly aimed at the boomers retiring.
This sounds like a variable annuity, what I still don't get is the part about receiving your money back. You might, you might not, depends on the value of the underlying investments. And by taking out 7%, there's a good chance your money won't last that long.

Can one of you financial geniuses on the board comment on these new funds? I'd love to get 7% income with safety.
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Old 10-22-2007, 07:41 AM   #5
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I'll be interested to know where they take the annual "payments" from: is it pro rata share sales, rebalancing sell-offs, div and gains only, some kind of strategy based on fixed v. stocks?

The asset allocation is interesting to me, but that distribution source thing is a black box so far. If they sold a fund of equities only with that allocation, I'd look at using it for my bucket 3/growth portfolio.
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Old 10-22-2007, 08:10 AM   #6
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It looks like Fidelity has designed their funds to spend down to zero at the end of the term you select. In other words, if you select the 2024 fund for example, you would have zero left in the account in 2024.

Vanguard, on the other hand, tries to protect your initial investment. Depending upon which of their three options you select, there is a direct risk:return tradeoff.

I think I prefer the Vanguard approach. If I wanted my account to go to zero, I would just by a guaranteed income annuity.

I am also considering the Vanguard fund for my bucket #3. I would still have the option to convert it to an annuity in the future when distributions could be higher.
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Old 10-23-2007, 08:00 AM   #7
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Here's a link describing the Vanguard offering:
Vanguard to Broaden Retirement Income Solutions with Three New Managed Payout Funds
  • Managed Payout Real Growth Fund—designed for investors who seek a modest initial current payout, and wish to see their capital and payouts grow in real terms (inflation-adjusted) over time. This fund is expected to sustain a managed distribution policy with a 3% annual distribution rate.*
  • Managed Payout Moderate Growth Fund—structured for investors who want to balance their initial payout stream with maintaining the purchasing power of their future payouts and capital.This fund is expected to sustain a managed distribution policy with a 5% annual distribution rate.*
  • Managed Payout Capital Preservation Fund—geared toward investors who seek a higher payout level to satisfy current spending needs while preserving their capital over the long term. This fund is expected to sustain a managed distribution policy with a 7% annual distribution rate.*
The key is understanding how the capital preservation fund plans to preserve capital "over the long term" while targeting a 7% annual distribution. I'll await the prospectus, but from these short blurbs it appears that they sacrifice growth for income. That makes sense, but I don't understand how they can hope to pay out 7% while preserving capital with a fund of funds approach.

Stay tuned, I guess.
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Old 10-23-2007, 01:45 PM   #8
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A link to the SEC filing for the Vanguard Managed Payout fund prospectus is below:

Link

BTW, when you say you "don't understand how they can hope to pay out 7% while preserving capital with a fund of funds approach", I would agree with your concern. The prospectus makes it clear that the payout levels and the principal growth (or preservation) for all the funds are not guaranteed, but of the 3 funds, the one featuring a 7% payout and preservation of principal sure seems to be the most aggressive and risky.

I look forward to these funds officially coming to market so we can learn more about them.
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Old 10-23-2007, 08:33 PM   #9
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The prospectus makes it clear that the payout levels and the principal growth (or preservation) for all the funds are not guaranteed, but of the 3 funds, the one featuring a 7% payout and preservation of principal sure seems to be the most aggressive and risky.
Thanks for the link. I read through the managed distribution policy, and their plan is to pay 7% of the average daily balance of a hypothetical account over the last three years. As we know from numerous studies, 4% is the more or less magical withdrawal ceiling to keep from running out of money before dying. But this is calculated as 4% of the initial balance, adjusted for inflation each year. The Vanguard withdrawal would be different than this, they would pay 7% of the average balance each year, regardless of fund performance or inflation.

If the market has good years, the Vanguard method is advantageous, because the fund increases in value and so do the withdrawals. But in bad years, the fund decreases its withdrawals, and if the net value goes less than the initial value, the withdrawals will be less than the initial. The hope is that the fund grows at least as fast as inflation. With a 7% withdrawal rate, it would need to grow at 10% to keep up with 3% inflation and not draw down the principal.

The 4% fixed withdrawal increases the annual withdrawals by inflation, so it provides a more constant income that grows with inflation whether the market has good or bad years. But it does this by a lower withdrawal amount than the planned Vanguard rate.

So I'm not sure which is better. I think it depends on your goals and risk adversity.
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Old 10-23-2007, 09:05 PM   #10
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I am hoping someone who knows how to model this might do a FireCalc-type backtest and see how it does. Maybe Vanguard will even provide such insight when they come to market.

I know these new funds will be actively managed across several asset-classes that probably don't have rich historical data, but if this 7% fund would not do well with a typical mix of assets, I would be cautious

In any case, I am looking forward to seeing the product. If it looks viable, it would be a great benefit to many people.
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