Vanguard SWR of 5%?

[CriticalMass]

Vanguard came out today with a new group of 3 "managed payout funds" and the Growth and Distribution Fund has an initial payout rate of 5% per year while being billed as "providing inflation protection and capital preservation over the long term."

My question is, this sounds like the SWR retirement portfolio everybody has been talking about, but the going wisdom of that SWR is 4%. There was a post a few days ago about an article written by Sharpe at Stanford arguing a SWR of 4.46% with a series of bonds, but with no surplus at the end of the term. Does Vanguard know something we don't know that it is able to offer a 5% SWR for the long run? Granted their rate is set per calendar year and there is no guarantee that it will stay at that rate in any of the subsequent years, but doesn't any portfolio have that inherent risk (hence the success rate < 100% by FireCalc?) It's also possible they set that rate high initially to attract initial investmet, but I believe Vanguard wouldn't risk their reputation and seems confident to deliver that return in the long run. What do you think?

 

[chinaco]

There are 3 funds with different payouts and risk profiles. Note that the funds goal is to payout x% and to preserve capital over the long-term... yada yada.

It seems that the fund is designed to be managed a bit like a pension (without the pooling of money benefit) with the goal being a dependable payout %. However, the balance will fluctuate, your $ payout will fluctuate. 5% of x$ will vary.

It sounds like a good idea for those who want an autopilot fund during the spending phase (as opposed to the accumulation phase).

It is another all in one fund that has slightly different goals and a corresponding management strategy. But make not mistake... the investor is taking the risk. No guarantee!

 

[CriticalMass]

I just realized there has been another thread that discussed these funds extensively. I

I am aware that there are 3 funds and the growth focus offers 3% payout and > inflation protectio, and the distribution focus offers 7% and < inflation protection. I also think you can mix the two half and half and derive the middle fund yourself.

I am just curious that when they claim it (the middle, or growth and distribution, fund) is going to have inflation protection and captial preservation for the long run, AND have a payout rate of 5% (no guarantee of course, but a serious claim for all intents and purposes,) it is a heck of a claim and is much better than the going wisdom of 4% SWR. What makes Vanguard able to do this?

 

[CriticalMass]

I guess the implied question is : if Vanguard can do this for you at 5%, why would anybody want to do it themselves and settle for a mere 4%?

 

[rgarling]

Vanguard recalculates payout each year based on the previous 3 years performance, which is different than the way SWR is calculated. So it is not magic, just different calculations. (oh and Vanguard will be using derivatives to help smooth returns)

 

[jIMOh]

There were several threads which might shed some light on the techniques used to get the returns needed.

Maybe the funds are leveraged?
Maybe the fund uses options?
Not sure what derivatives are, but it appears the funds will use those too.

Think about this- there was a thread where someone suggested how an indexed annuity product worked. Maybe VG will do something similar.

Maybe they get $10,000 and guarantee a 5% ($500) payout. They could do this by
a) set aside $500 in cash, then invest the other $9500 to gain 5.3%.
b) in a year where bonds pay 5%, they buy lots of those bonds and payout the interest only.
c) buy options to purchase stocks at a 5% increase from where they are presently priced. The options are cheaper than the stock price (but has risk the strike price is not reached) so the other monies can be invested somewhere else.
d) the fund can take any year with greater than 5% returns and create more wealth.

**also consider the SWR is 4%, based on increased spending for inflation and similar, at some point the portfolio will be withdrawing more than 5%**

The SWR also means spending down principal. A payout fund pays a steady stream of 5% of NAV each year. That 5% does not keep up with inflation unless NAV increases.

Please correct any of above comments or clarify if something is inaccurate.

 

[rgarling]

vanguard won't be guaranteeing anything, except that they will use this formula to calculate the monthly distribution per share for a given calendar year:

Monthly distribution per share = ({3% or 5% or 7% depending on which fund} / 12) x ( {average daily value of the account over the prior 3 calendar years} / {Number of shares held by the account at the end of the prior calendar year} )​

 

[jIMOh]

vanguard won't be guaranteeing anything, except that they will use this formula to calculate the monthly distribution per share for a given calendar year:

Monthly distribution per share = ({3% or 5% or 7% depending on which fund} / 12) x ( {average daily value of the account over the prior 3 calendar years} / {Number of shares held by the account at the end of the prior calendar year} )​

this assumes the person was invested in the fund the 3 previous years. what if I roll a 401k over tomorrow and need a check next month?

 

[youbet]

vanguard won't be guaranteeing anything, except that they will use this formula to calculate the monthly distribution per share for a given calendar year:

Monthly distribution per share = ({3% or 5% or 7% depending on which fund} / 12) x ( {average daily value of the account over the prior 3 calendar years} / {Number of shares held by the account at the end of the prior calendar year} )​

Yes indeed. Some folks seem to be missing that.

FireCalc methodology which backtests SWR schemes looks at survivability of WR's + inflation vs historical market/inflation data. Success = portfolio greater than zero.

Here, Vanguard is running a balanced fund and distributing a percentage based on the average value over the past three years.

Two different strategies. 4% + inflation every year and 5% of the average value of the fund over the past three years is an apples to oranges comparison.

 

[youbet]

this assumes the person was invested in the fund the 3 previous years. what if I roll a 401k over tomorrow and need a check next month?

No it doesn't. Read the formula again. It pays out based on the value of the fund, not your holdings in the fund.

Only the first three years will lack data for the calculation and I assume they have something in mind for that.

 

[rgarling]

I'm not sure what they will do at the outset. Perhaps, they will back-cast their initial holdings for 3 years and then apply the formula. The "account" referred to in the formula is a 'hypothetical account' according to the perspectis, so I guess it will be used to calculate a generic payout sum per share and will be applied to the number of shares that an individual account holder has.

 

[jIMOh]

No it doesn't. Read the formula again. It pays out based on the value of the fund, not your holdings in the fund.

Only the first three years will lack data for the calculation and I assume they have something in mind for that.

I read the equation three times before I posted.

One time I interpreted account as NAV, the other two times I interpreted account as what I invested in MY account.

Clear as mud

 

[youbet]

I read the equation three times before I posted.

One time I interpreted account as NAV, the other two times I interpreted account as what I invested in MY account.

Clear as mud

Yeah..... see what ya mean.

 

[cashflo2u2]

I guess the implied question is : if Vanguard can do this for you at 5%, why would anybody want to do it themselves and settle for a mere 4%?

Agreed, but you can also bake your own bread, cut your own firewood and dig your well, etc. but I retired to Pleasantville and I want to go fishing.