Vanguard Managed Payout Fund–A Simplified Strategy for Retirement Income

Simpler is better. Wouldn’t it be great if retirees could invest in a single mutual fund that (1) invested their nest egg wisely, and (2) automatically distributed retirement income each month? Enter the Vanguard Managed Payout Fund.

A reader named Paul alerted me to this option the other day. It turns out that Vanguard had three such funds, but is merging them all into a single fund next year. Paul’s question had to do with how the merger will affect the NAV (Net Asset Value) of the funds. I thought this would be a good opportunity to review Vanguard’s Managed Payout Fund for those in or nearing retirement.

How Does the Vanguard Managed Payout Fund Work?

As I mentioned, Vanguard is in the process of merging three funds into one. The one surviving fund is called the Vanguard Managed Payout Growth and Distribution Fund (VPGDX). So let’s look at the fund that will survive.

The fund works like a fund-of-funds. Rather than investing directly stocks or bonds, the Managed Payout Fund invests in other Vanguard funds. Below is a list of the funds that currently make up the portfolio:

Vanguard Growth and Distribution Payout Fund Composition

What the fund owns

As you can tell, the fund invests aggressively for those in retirement. Its total equity exposure is near 80%. Here’s a snapshot of the fund’s allocation according to Morningstar:

Asset Allocation--Vanguard Managed Payout Gr & Dis Inv Fund VPGDX

What the fund owns

The “other” category consists primarily of investments in real estate and commodities. So why the aggressive allocation? The fund seeks to distribute five percent of the balance each year. Since the distributions are critical part of the fund, let’s look at how the work in some detail.

How VPGDX Makes Distributions

What sets this fund apart is how it distributes fund assets. In January of each year, fund management determines how much of the fund it will distribute to investors. The target for the merged fund beginning in January 2014 is four percent, although this could change from year to year based on performance. Once the distribution level is set each year, those invested in the fund will receive distributions monthly. You can find a link to a case study that walks through how this works on the Vanguard website.

Fees & Minimums

The fees for this fund are high by Vanguard standards. The fund has an expense ratio of 0.43%, although this is much less than the more than one percent average of similar funds. The minimum contribution to invest in the fund is $25,000.

Vanguard Managed Payout Growth and Distribution Fund Investor Shares - Fees & Minimums

Vanguard Managed Payout Growth and Distribution Fund Investor Shares – Fees & Minimums

Morningstar’s Take

I always see what Morningstar has to say about a mutual fund before investing. In fact, I’ve published extensive guides on how to use Morningstar’s free and premium tools. Morningstar gives the fund 4 out of 5 stars. It shows the fund’s yield at nearly 4.5 percent. It also notes that the fund is riskier than similar funds, no doubt due to the large allocation to equities. Here’s a snapshot of the fund’s performance from Morningstar:

Morningstar Snapshot of VPGDX

Morningstar Snapshot of VPGDX

Final Thoughts

Until a reader brought this fund to my attention, I didn’t realize Vanguard offered such a fund. Perhaps that’s because I’ve not yet hit retirement. For those in retirement, however, the fund offers an alternative to high cost annuities that is worth considering.

Published or Updated: October 28, 2013
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Rodger Frego says:

    I’ve seen the Vanguard Payout fund (PVGDX) before but never gave it much thought. A question that comes to mind is the .43% expensive ratio on top of the expense rations of the underlying funds they invested in to make up the fund? If so wouldn’t it be cheaper to just buy the individual underlying funds outright and create your own portfolio thus saving the .43%?

    • Rob Berger says:

      Rodget, that’s a great question. I assume the .43% is the total expense ratio, given that all of the funds within the fund are Vanguard funds. But it’s a question worth asking Vanguard if you are considering this option.

  2. John F. Hoff says:

    I already invest with Vanguard through my company’s 401-K.
    Which is through Fidelity Investments.
    The two funds I invest in on a bi-weekly basis are, VANG STAR
    and American Funds EuroPacific Growth Fund Class R-6. And,
    of course, my company’s own Profit Sharing Fund, which gets
    added to the beginning of each year.
    My question is; Can I take $25,000 out of my current funds and
    invest it into a VPGDX fund and hold off taking any payouts till
    I retire in 2020 when I’ll be 67? And please understand the
    question is not; Should I? But can I?
    Thank you for your time.

    • Rob Berger says:

      John, I believe the fund is designed to make automatic distributions each month, something you don’t want to happen until you actually retire. You could always give Vanguard a quick call to confirm. I’ve found them to be very helpful.

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