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.
Table of Contents:
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:
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:
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.
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:
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.