Opinions on the New Income Replacement Funds

[Rich_in_Tampa]

I should mention that the post provided no source for its information and I didn't verify it.

[Rich_in_Tampa]

Originally Posted by cute fuzzy bunny

Hmm, no REIT, no emerging markets, no foreign bonds and no cash. Interesting.

Also interesting how aggressive the distribution fund is and how fairly close all three are. Which is pretty much what I've been seeing in daily movements of the funds.

I noticed that, too. Could be they are just starting to spread their wings. The growth one has my eye as a replacement for my current stock bucket which now has TSM, International, and a dollop or REITs and Small idx. I wouldn't mind a touch of commodities but could do without the market neutral, though only 10%.

[cute fuzzy bunny]

Looks like they want to be fully invested and arent too scared of that, and maybe they dont like the price of reits still.

I'm not thrilled with the market neutral part either, but like you I dont mind a little bit of it. Maybe it'll turn out to be a plus.

The funds are nice one stop diversifiers. Sure, I could buy my own buckets, do my own rebalancing and look for market opportunities to shift from overpriced assets to discounted ones.

But for 25-30bp's, I can also feel pretty okay with someone else doing it for me and in the process primarily using broad indexes for most of the underlying components.

I ended up shifting about 2/3 of my taxable money into these and balanced them so I'd get about a 4.5% payout. I'll tweak and reinvest to suit over time until we have a nearly neutral cash flow.

Considering whether to employ the 3% fund in place of some target retirement/lifestrategy holdings. Not sure I want to put most of my eggs in the same basket though.

Very interesting to see how aggressive the distribution fund is. They're really counting on long term performance and not allocating to mitigate volatility or playing to not lose too badly...

[Rich_in_Tampa]

Originally Posted by cute fuzzy bunny

I ended up shifting about 2/3 of my taxable money into these and balanced them so I'd get about a 4.5% payout.

Taxable money?

Not sure you're gonna like your taxes on that fund next year. Seems like it's going to be pretty active in there...

[WilliamG]

Originally Posted by Rich_in_Tampa

I should mention that the post provided no source for its information and I didn't verify it.

Just looked at Vanguard's site and verified. They have updated holdings as of May 31.

[Danny]

I think I'm finally ready for these in my IRAs - I'll stay with MMF & Munis in my taxable accounts.

[. . . Yrs to Go]

Originally Posted by Rich_in_Tampa

Taxable money?

Not sure you're gonna like your taxes on that fund next year. Seems like it's going to be pretty active in there...

Probably true, but isn't taking and spending distributions the point of these funds?

[cute fuzzy bunny]

Originally Posted by Rich_in_Tampa

Taxable money?

Not sure you're gonna like your taxes on that fund next year. Seems like it's going to be pretty active in there...

Eh, its pay them now or pay them later. My tax situation is unlikely to change very much over the next 20 years, so I'm fine with some capital gains.

I'm presuming (maybe a big presumption) that they're not going to be complete morons about it. I know they've said this will "not be tax managed in any way" but I'm expecting them to pay the payouts from dividends as available and only sell as needed to meet the gap. I'm also expecting them to make smart periodic trades and rebalancing as asset class values change, but I'm not expecting them to continuously thrash trade between one asset class and another.

In any case, I cant imagine it'll be any worse than what I'd get if I were doing the same things myself.

But...we'll see...

[utrecht]

Can someone explain the basic idea behind these funds to me? When you say "7% fund...5% fund" do you mean they are paying you 7% of your total invested money like it was a CD paying 7%? And there is still some chance, however little, of some growth?

[cute fuzzy bunny]

There are some other threads on the subject, and you should read the prospectus, but the short answer is that the 3% fund will invest more aggressively and pay out less while the 7% fund is somewhat more conservative and pays out more. The percentage is based on a running 3 year average of the share price...first 3 years will be interpolated.

The 3% funds purpose as stated is to pay 3% and see capital gains well in excess of inflation. The 5% fund is anticipated to maintain principal with inflation adjustment. The 7% fund will preserve principal but is not expected to keep up with inflation.

If the markets do well, all three might be able to come up with some growth, but using historic returns as a guide its unlikely that the 7% fund will keep up with inflation while making that sort of payout. These "endowment fund" type asset allocations may be able to knock out a real return of 5% without too much trouble but 7% is a push.

For one with patience and for a given initial investment, the 3% funds actual dollar payout may be higher than the 7% fund after a 10+ year period...

[utrecht]

The yield on VFINX is 2% so if youre comparing that and these funds, isnt it the same as calling VFINX a 2% fund?

The 3% fund is down 2.8% since 4/23
VFINX is down only 1.1% since that time.

Is it really suppossed to lose by that margin to an SP500 index fund in a down market?

[Rich_in_Tampa]

Originally Posted by . . . Yrs to Go

Probably true, but isn't taking and spending distributions the point of these funds?

Yes, but that's not necessarily the only place they might fit. Especially the 3% fund which looks alot like what I might have set up myself other than the market-neutral stuff. And even after FIRE probably won't touch the fund for a long, long time.

CFB, yes the tax implications are highly individual. I see your point.

[cute fuzzy bunny]

Originally Posted by utrecht

Is it really suppossed to lose by that margin to an SP500 index fund in a down market?

Too short of a time frame to make a fair comparison. Try it with a 2-5 year window in place. I suspect you'll see higher returns than the s&p 500 with similar volatility or similar returns with less volatility.

The payout figure is fixed for the next 11 months, when it'll be adjusted to whatever variation the share price has experienced. So it might pay to just not watch its daily/monthly twitches and just look at it as a pension payout that may fall or rise a few percent each year.

Rich...I dont need to cruise into my 60's with $2M in capital gains sitting on my shoulders...I dont mind paying it off 5-10k a year. Again remember that we dont have to make any debt payments, and we shelter much of my wifes part time income, so our tax profile is still pretty small. I've been turning our own portfolio from overpriced stuff to cheaper asset classes periodically for the last 7 years and I manage to kick up a fair bit of turnover tax cost. But its always at a cheap rate.

[Dawg54]

Originally Posted by cute fuzzy bunny

Hmm, no REIT, no emerging markets, no foreign bonds and no cash. Interesting.

Also interesting how aggressive the distribution fund is and how fairly close all three are. Which is pretty much what I've been seeing in daily movements of the funds.

A little too aggressive for my blood. My AA is roughly 50/50 which is on the high end for me. I hope to be closer to a 40/60 mix before long. Of course I'll probably be in a poor folks soup line when I'm old but hey, I'll sleep well until I get to that point.

[utrecht]

The 7% fund started at $20 and a payout of .1167 per share per month which equals 7% for the year. The NAV of this fund is now 19.44

If I was to buy some of the fund right now, do I still get .1167 per share per month meaning I get 7.2% payout? If so, does my payout still reset at the same time as everyone elses or do I get that payout for 1 year from when I buy the fund or what?

[cute fuzzy bunny]

You'd get the stated payout for the remainder of the year until the fund resets again, I guess next April. I'm 99.99% sure they dont recalculate the payout figure for new purchases.

Do note though that this isnt 'free money'. You'll simply be taking a slightly higher amount paid out of your principal. Its not like buying a CEF or bond at a discount and getting the higher yield for free and your principal back at the end.

[cute fuzzy bunny]

FYI...in looking at the current distributions, the funds seem to be showing the following for payouts. Part is "investment income" and part is "return of capital".

Off the top of my head, the 7% fund was about 80% ROC and 20% income, the 5% fund was close to 50/50 and the 3% fund was ~40/60.