Vanguard's Managed Payout funds, which are currently in registration with the Securities and Exchange Commission, are also designed to generate monthly cash payouts without consuming principal.

I see a major difference between the new Vanguard and Fidelity retirement funds.

The article states this about the Fidelity funds,

The distributions, which seek to keep pace with inflation, are expected to come from dividends, fund appreciation and a portion of principal. Meanwhile, the remaining assets stay invested.  

I'm not sure how the second difference listed below will affect the payouts on these funds. 

(Vanguard funds) Monthly payouts are adjusted each year based on the fund's performance over the three previous years (Fidelity's payouts are based on the annual account balance.)  

helmut

Add Schwab to the list.  It's also coming out with one

Roberta 

"without consuming principal"

That's a joke 

One will own less shares of their mutual fund after each distribution!

Marshall

Of course, the number of shares you own is not affected by a distribution, but the NAV does decrease by the amount of the distribution. I expect that their goal is to use asset allocation to keep the NAV fairly level and make distributions from investment income and realized capital gains.

OK, that makes sense.

Personally I could see the most conservative version of these managed distribution funds as simply a really well diversified balanced fund for an accumulator, or a retiree who wants to set aside a percentage of his assets for diversified growth.

Marshall

From what I have read so far, I have not seen anything stating Vanguard intends to sell shareholders individual shares in the retirement funds to satisfy their managed distribution policy. CEF's with similar policies certainly do not do that.

There are several ways Vanguard can accomplish their objective without selling the shareholder's individual shares. Along with dividends, they can do what many CEF's do with managed distribution policies, they can sell shares in their holdings in individual companies then pay the remaining distribution with either the increase in realized capital gains or return of capital in the case of capital losses.  

If I'm not mistaken any return of capital is not a taxable event. This is an advantage over converting capital gains or losses into dividends using dividend capture.

helmut 

Income Builder Funds are a much better option for all the reasons this forum has come to know.

Marshall

Avalon:

Income Builder Funds are a much better option for all the reasons this forum has come to know.

Marshall

 
"... thinking beyond what you are allowing yourself to acknowledge as understanding would require you making a change that would affect your personal self esteem as an investor...."

Someone else might as well take your advice because you are not using it.

helmut 

Good to see you weighing my every word.

M

And that's a QUALITY 3 or 5 or 7%........not JUNK!

(I'm not sure why Fidelity is advertising consumption of principal unless their funds are intentionally targeted for people who want a zero balance upon death. Maybe their referring to selling growthy stock shares?)

These 2 funds should make it clear that investors need not take inordinate risks to get income as high as 7%/yr and still have the portfolio grow and the income keep up with inflation.

Running around like a chicken-without-a-head chasing yield is never a good option. 

Good Luck, Ken. 

The Vanguard funds were discussed here several weeks ago.

The Vanguard does not guarantee to provide a real, inflation adjusted distribution.  It seeks to provide one, which is not a guarantee.  Provided the fund NAVs rise, over time, by inflation, so will the distributions.  If they fall, the distributions will be cut.

It seems that the 3% fund is a waste of time.  I could put my whole portfolio in individual TIPS and receive that, forever.

The 5% fund might provide some value to retirees.  After all, the long term rate of return of the stock market has been 10%, with 4% of that coming from yield and 6% from growth.  To provide 5% means that the fund has to average 2% yield, and 3% growth, over time.  I don't think it too difficult a task.

If I wanted, or needed, 7%, I'd go with Vanguard's other seasoned fund, VWEHX, rather than the new, untested one.  After all, a 7.34% yield in the hand is worth more than some 7% yield/growth combo in the bush.

ElLobo:

It seems that the 3% fund is a waste of time.  I could put my whole portfolio in individual TIPS and receive that, forever.

Where are you buying TIPS with a current yield of 3%?  The market data printed in today's Wall Street Journal lists a yield to maturity of 2.3% for most of the issues.  The one maturing in Jan 2008 has a yield to maturity of 4.0%, but that yield disappears in three months.

In addition, the Vanguard Managed Payout fund that expects to sustain a 3% payout has an investment objective of inflation protection and capital appreciation (not only the inflation protection provided by TIPS).

The biggest advantage of these funds may well be having both your assets and your withdrawals professionally managed at the same time and place for .35% of AUM.

Then there is the issue of traditional withdrawal studies that says 7% withdrawals won't work over 25 or 30 years.  In my view, most retirees who go for the 7% will be investing at far lower levels of fixed income than they would do on their own.  Because the rest of the  mix is not just traditional equity funds, the excess risk MAY  be somewhat mitigated.  A couple of really bad market scenarios showing up and it doesn't seem likely this will work. 

But then that is true for any investment strategy, other than individual tips, IMO.

Very few retirees that I have talked to really expect to die with more than they go into retirement with.  If they begin to build assets considerably greater than their initial nest egg, the normal reaction would be to spend more, or gift to children or grandchildren.

So the prospect of losing some principal over time perhaps is not that big a deal to me.

best,

Bill

mean to imply the income was guaranteed to grow with inflation, nobody can guarantee that, not even income builder funds.

VWEHX by itself would be too risky for me, besides there's not much growth potential.

Good Luck, Ken. 

Pat,

You're obviously right.  I didn't check current TIPS yields.  I recalled they were somewhere between 2 and 3 percent.

Nevertheless, to provide a 3% safe rate of withdrawal, a portfolio need only have a yield greater than 3%.  I believe that the Vanguard fund is useful for those who have no clue how much they can safely withdraw from their portfolio during retirement, and rely on Vanguard.

Bill,

I DO agree that the 7% fund will be a Godsend for those REQUIRING such a withdrwal during retirement.  I predict that, of the 3, this will be the most successfull, in terms of assets under management.

In fact, had these funds been available back in 2003, I may have use the 7% fund for most of my portfolio.  After all, at that time, I used VWEHX for 50% of it!  I still might!  Maybe take half of our VWEHX holdings and convert to the new fund.  See what happens.

"Very few retirees that I have talked to really expect to die with more than they go into retirement with.  If they begin to build assets considerably greater than their initial nest egg, the normal reaction would be to spend more, or gift to children or grandchildren."

Absolutely.  The difference, perhaps, between you and I (and a minor one at that!) is that we prefer to spend that principle rather than loose it to the market.  Much more control.

http://www.marketwatch.com/news/story/retirement-income-products-reduce-guesswork/story.aspx?guid=%7B00FBB2C1%2DA77E%2D48D0%2D96B4%2D8D09F961ECEA%7D

Another country heard from.......

best,

Bill

Well, after posting the following over 9 and one-half hours ago on the Investing during Retirement forum and the link from CBS MarketWatch but not getting any replies there, I've finally arrived at the right place.

Good job, Denny!

I said:

In the case of the Vanguard Payout product, I'm interested to see how far back historically Vanguard's backtesting will go and how many asset classes it will include in order to "fudge" the monthly distribution rate. Also, I'm wondering how much time it will take for this product to get all of its legs, that is, to use allocations such as absolute return, commodity ingredients, and the other features as given in the N1-A. Finally, what is the likelihood that the Real Growth Payout option can outperform the S&P 500 if the investor reinvests distributions? Can Real Growth, as an asset allocator, be a total return product that exceeds the S&P?
 

Bill,

Thanks for the Marketwatch reference.  It was a good summary, of both the products as well as the problems they are trying to solve.

From the MarketWatch article: 

"Until the funds have three years under their collective belts the payouts will be fudged, and most likely based on back-tested strategies,"

From the preliminary prospectus Vanguard filed with the SEC: 

"The hypothetical account value is averaged over the prior three years in order to increase the relative predictability and relative stability of distributions to shareholders from year to year. A modified version of the formula will be used until the Fund has established three calendar years of history. In the first calendar year of the Fund, the monthly per-share distribution will be based on the initial per share value of the hypothetical account. In the second calendar year, the average daily balance of the hypothetical account over the prior calendar year (or the portion of the prior calendar year for which the Fund was in existence) will be used to determine the monthly distribution per share. In the third calendar year, the average daily balance of the hypothetical account over the prior two calendar years will be used to determine the monthly distribution per share."

"The hypothetical account value is averaged over the prior three years in order to increase the relative predictability and relative stability of distributions to shareholders from year to year. A modified version of the formula will be used until the Fund has established three calendar years of history. In the first calendar year of the Fund, the monthly per-share distribution will be based on the initial per share value of the hypothetical account. In the second calendar year, the average daily balance of the hypothetical account over the prior calendar year (or the portion of the prior calendar year for which the Fund was in existence) will be used to determine the monthly distribution per share. In the third calendar year, the average daily balance of the hypothetical account over the prior two calendar years will be used to determine the monthly distribution per share."

Finally, what is the likelihood that the Real Growth Payout option can outperform the S&P 500 if the investor reinvests distributions?

You're attempting to compare a retirement income product with an accumulator growth product???

I can only guess you haven't supplied sufficient background information as to why you'd be considering these two very different funds for the same slot in your portfolio.