Opinions on the New Income Replacement Funds

[chinaco]

Vanguard has the Managed Payout Funds

Fidelity has the Income Replacement Funds.

Anyone have any interest in these funds? They seem to have fairly low fees with the goal of managing the payout rate.

I looked at them briefly. Does anyone have a good reason to go for one of these over using the traditional balanced fund approach or one of the VG target 20XX funds?

[REWahoo]

Lots of discussion about these funds in this thread a couple of days ago:

http://www.early-retirement.org/foru...ley-35055.html

[youbet]

Yes, check out the other thread as per REWahoo.

And note many folks are expressing various misunderstandings regarding "guarantees" Vanguard is making...... which actually they're not. It pays to read the web site very thoroughly and more than once......

[saluki9]

To the average contributor to this forum I don't believe they add a lot of value. However, for somebody who isn't interested in the day to day management, don't have good rebalancing discipline, or the older retiree I think they can be useful.

[chinaco]

The investor takes the risk... there is no guarantee.

VG advertises their fund and positions it a bit differently. VG targets a payout rate but does not hint at the duration.

Fidelity has 11 funds with target end dates. The target date has an associated payout rate.

They seem to be similar. But they also seem to have slightly different ways of looking at the problem. Perhaps they are managed a bit differently.

I like the fidelity naming convention... it gives one an idea of expected longevity of an investment in the fund.

The VG fund does not hint at the longevity of an investment in the fund.

[DblDoc]

I think we need to wait and see how they perform and how they invest. Fortunately I have a few more years to RE so I can wait and follow CFB's adventure into these funds...

DD

[cute fuzzy bunny]

Well the vanguard funds dont have a duration. They'll pay that percentage of your principal out forever.

Of course, your principal might be four cents after some period of time if things dont go well. Or it might double in 20 years.

The fidelity funds actually plan to consume principal and run out of money by their end date. They may be more successful than expected and still have residual principal left at their expiry. Or they may fall short.

The reason why I threw some money in the pot early is simple. The fund managers have a LOT of options for investing the money and they want a smooth roll out. I dont expect these funds to draw in a ton of money right off the bat. People will take a wait and see approach. So the initial 6-12 months will be a long way from fund bloat, and they can cherry pick their very best prospects from the list of goodies available.

If they're successful and the 3% fund has a nice capital appreciation, the 5% outpaces inflation with the payout included, and the 7% fund holds its own...I'd expect a fair bit of money to flow in. Especially if they start cutting the ER, which I fully expect them to do as the assets flow in.

I could DIY it, but the fund costs over a regular vanguard fund arent that much, they are providing access to some stuff like commodities that vanguard doesnt sell (still waiting to see how they implement it) and its zero work for me. Nice piece of diversification and a nice shot at making some good money during the rollout.

Or maybe the market goes into full recessionary tilt and they get killed along with everyone else.

I imagine they've thought long and hard about that last piece, because the last thing they want is a major failure to launch on these funds.

That they're willing to go ahead with them now tells me they're pretty comfortable that things are going to turn up a bit, or that they can do some bargain shopping and contrarian moves to make up for it.

And again, its not like I threw half my money into it. Fer crying out loud I have more money in wellesley and in the high yield corp fund than I have in these.

But with cash yields declining, all I want to hold of that is in my penfed cd's so the money market money went into these. If they perform well, I'll slip some of that wellesley over to them.

I like the monthly payouts a lot. Really smooths out the income stream. The funds that pay quarterly require me to buffer the income to expenses in a money market. That was super when the MM's were paying north of 5%. Now that they're headed below 2%, I think I'll pass.

And I'll admit it: its fun to have a new toy!

[Ronnieboy]

I watched the little "How does this work?" video on Vanguard and while I know they are pitching a product, it does look interesting. I am nowhere near ER, so I am not their target audience, but it would be curious as to which Vanguard fund it could be compared to if I wanted to reinvest the "monthly payout".

[chinaco]

Quote:

Originally Posted by cute fuzzy bunny Well the vanguard funds dont have a duration. They'll pay that percentage of your principal out forever. Of course, your principal might be four cents after some period of time if things dont go well. Or it might double in 20 years. The fidelity funds actually plan to consume principal and run out of money by their end date. They may be more successful than expected and still have residual principal left at their expiry. Or they may fall short.

The VG product looks interesting. I am intrigued with them...

That was how I interpreted the Fidelity fund also.

I intend to study both sets of products more closely.

It may be a good way to go. During the decumulation phase of life... the VG funds may be a decent all in one fund. Perhaps a better choice than the target funds...

[cute fuzzy bunny]

Due to the diversification available, I'd consider the 3% fund with reinvested dividends in a tax advantaged account for an accumulator.

[cute fuzzy bunny]

Woo hoo! For some inexplicable reason the 3% and 7% funds both went up a penny today to $20.01. I made sixty bucks!!!

This is like playing the slot machines!

[Rich_by_the_Bay]

I went back and took another look today, wondering whether the 3% fund might make a good bucket 2 holding (let's not go there...) and still see no substantive information about the anticipated AA (can't even tell stock v bond) or payout scheme. It's really like buying a black box for the moment (I saw the filing claims re: AA but even that was too vague to be useful). Trust us, we're Vanguard.

Not a bad claim, I admit, but I can't help but feel I'd need more information before buying. Anyone got more info on these details?

CFB, nice going on your $60 gain. Plan on cashing out?

[cute fuzzy bunny]

Nah, I think I'll let it ride.

I'm expecting the 3% fund to have about 50-60% equities split between total stock market and ftse ex-us, about 15% market neutral, about 10% reit, about 10% commodity and the balance in total bond market.

My guess on the 5% fund is taking about 10% away from the TSM/ftse equities and a few percent of the reit and commodity pieces and rolling those to bonds and other cash equivalents.

My guess on the 7% fund is a little bit more again from the same places towards bonds and other cash equivalents.


Equities to bonds/cash/other non-equity/non-bond, about 70/30, 60/40 and 45/55.

Now pull the lever and....

[cute fuzzy bunny]

These were the alleged layouts. Gives them the flexibility to be 100% in equities or 70% in cash/bonds/fixed income.

ASSET CLASS OR INVESTMENT VANGUARD FUND ASSET ALLOCATION RANGE
(MINIMUM-MAXIMUM)
-------------------------------------------------------------------------------------------

U.S. Stocks Total Stock Market Index Fund 15%-35%
-------------------------------------------------------------------------------------------
Non-U.S. Stocks FTSE All-World ex-US Index Fund 15%-35%
-------------------------------------------------------------------------------------------
Bonds Total Bond Market Index Fund 0%-25%
-------------------------------------------------------------------------------------------
Cash Market Liquidity Fund 0%-20%
-------------------------------------------------------------------------------------------
Market Neutral Investments Market Neutral Fund 0%-25%
-------------------------------------------------------------------------------------------
Commodity-Linked Investments Not applicable 0%-10%
-------------------------------------------------------------------------------------------
Inflation-Linked Investments Inflation-Protected Securities Fund 0%-20%
-------------------------------------------------------------------------------------------
Real Estate Investments REIT Index Fund 0%-10%

[chinaco]

The funds charter give them pretty broad powers to move money around as they see fit. I agree with Rich... black-box is a good description.

Still, it may have a place. The same for the Fidelity Income Replacement funds.

It early... I am drinking coffee... and the brain is spinning up. But here goes.

Rich mentioned bucket 2... ala Lucia.

I intend to manage income/spending to a decade of planned funding (sort of a bucket approach)... but more for segmenting the money and ease of management... Like a firewall so we do not rob future years. I will have 4 buckets one for each decade of planned FIRE.

I am considering using the auto-pilot target funds for a bucket 2, 3 and 4 early in FIRE. They will be in allocated to funds that are more aggressive the further out in time.

I wonder if one of those Fidelity Funds could provide bucket 1 funds (one that spends down in 8-10 years).... instead of using a mix of cash and bonds.

I had considered bucket 1 to be bonds and cash. Now I am wondering of a smaller emergency reserve fund in bonds/cash with one of the fidelity or VG payout funds as the main income engine.

OK... let the dart throwing begin.

[kat]

I decided (95% sure) to put a sum of money into one of these funds, which would be sufficient to produce a monthly pay out that would cover my recurring monthly expenses (health insurance, utilities, food, gas, etc.). My self-funded "pension".

I'd continue having dividends from other funds go to my money market account, from which I pay annual and semi annual expenses and everything else.

My goal is to spend less time managing my money.

[Ronnieboy]

@CFB
Do your monthly payouts start immediately (next month) or is there a 3 yr holding period to get the averaged monthly payout?

[cute fuzzy bunny]

They start immediately and IIRC they use extrapolation until they've got 3 full years worth of data.

Chinaco...all mutual funds except for index funds are black boxes. Really. They may be restricted to US stocks or a particular other asset class by prospectus, but theres usually plenty of leeway for them to buy good and bad investments within those categories.

By nature of this sort of fund and the expectations I've seen vanguard set, the high end one probably wont be any 'riskier' in terms of loss of principal than any of the other vanguard 70/30-80/20 funds but they may be more volatile. The 7% fund probably wont be any riskier in terms of lost principal than wellesley.

They'll excuse volatility by saying "hey, dont worry about it! Your check is still going to show up this month, and next month..."

I can live with that.

[chinaco]

Apparently there are some other companies delivering these types of funds for retirees. This NYTimes article provides a brief description of some of those products.

http://www.nytimes.com/2007/11/25/bu.../25income.html

[Ronnieboy]

O.K. Excuse my naiveté, but why wouldn't this type of investment be good for non-retirees?
If I had 20 years to go, plop down the minimum investment of $25k let it sit around for awhile and have a larger pile (in theory) when I do retire.
I would be getting a monthly check (maybe enough to fill the gas tank).
I get the tax implications of the monthly distributions, but that isn't any worse than interest earned on a CD. And my principal keeps growing.